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Sticking It Out: Entrepreneurial Survival and Liquidity Constraints

Author

Listed:
  • Douglas Holtz-Eakin

    (Syracuse University)

  • David Joulfaian

    (U.S. Department of the Treasury)

  • Harvey S. Rosen

    (Princeton University)

Abstract

We examine why some individuals survive as entrepreneurs and others do not. In addition. we analyze the growth of entrepreneurial enterprises, conditional on surviving. Our focus is on the role of access to capital--to what extent do liquidity constraints increase the likelihood of entrepreneurial failure? The empirical strategy is based on the following logic: If entrepreneurs cannot borrow to attain their profit-maximizing levels of capital, then those entrepreneurs who have substantial personal financial resources will be more successful than those who do not. The data consist of the 1981 and 1985 federal individual income tax returns of a group of people who received inheritances. These data allow us to identify those individuals who were sole proprietors in 1981, and to determine the extent to which the decision to remain a sole proprietor was influenced by the magnitude of the inheritance-induced increase in liquidity. The results are consistent with the notion that liquidity constraints exert a noticeable ifluence on the viability of entrepreneurial enterprises. For example, a $150,000 inheritance increases the probability that an individual will continue as a sole proprietor by 1.3 percentage points, and conditional on surviving, the receipts of the enterprise increase by almost 20 percent.

Suggested Citation

  • Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Working Papers 698, Princeton University, Department of Economics, Industrial Relations Section..
    • Handle: RePEc:pri:indrel:319
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    References listed on IDEAS

    as
    1. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "The Carnegie Conjecture: Some Empirical Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(2), pages 413-435.
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    4. Blanchflower, D. & Oswald, A., 1990. "What Makes A Young Entrepreneur?," Papers 373, London School of Economics - Centre for Labour Economics.
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    More about this item

    Keywords

    entrepreneurship; liquidity constraints;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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