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Entrepreneurship and Risk Aversion

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Abstract

Evans and Jovanovic (1989) find that wealth is an important determinant of business startups due to liquidity constraints. However, Cressy (2000) argues that if risk aversion is a negative function of wealth, Evans and Jovanovic's empirical results could be spurious and the positive effect of wealth could be due to the omission of risk aversion in the regression equation. In other words, according to Cressy, one's wealth does not have any e®ect on business startups once the degree of risk aversion is accounted for. This paper attempts to inves-tigate the validity of Cressy's conjecture. We empirically examine the e®ect of wealth on the transition into self-employment, while allowing for the effect of risk aversion. Our empirical findings show that Evans and Jovanovic's (1989) results are robust, i.e., wealth has a positive e®ect on business startups even allowing for the confounding e®ects of risk aversion.

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  • Kamhon KAN & Wei-Der TSAI, 2005. "Entrepreneurship and Risk Aversion," IEAS Working Paper : academic research 05-A008, Institute of Economics, Academia Sinica, Taipei, Taiwan.
  • Handle: RePEc:sin:wpaper:05-a008
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