Entrepreneurship, Wealth, Liquidity Constraints and Start-up Costs

Raquel Fonseca (), Pierre-Carl Michaud and Thepthida Sopraseuth

No WR-500, Working Papers from RAND Corporation

Abstract: The authors study the effects of liquidity constraints and start-up costs on the relationship between wealth and the fraction of entrepreneurs in an economy. They develop a dynamic occupational choice model with endogenous wealth and entry into entrepreneurship. The model predicts that, with liquidity constraints, the probability of entering entrepreneurship is an increasing function of individual wealth while the introduction of start-up costs tends to flatten this relationship. The theoretical predictions can be tested on cross-sectional data with exogenous variation in liquidity constraints (e.g. access to credit) and business start-up costs. They use three highly comparable micro datasets (SHARE, ELSA and HRS) providing harmonized data on wealth and work status in 9 countries that characterized by very different levels of start-up costs and liquidity constraints. Their results support their theoretical predictions. While higher liquidity constraints yield a positive relationship with wealth profile for the fraction of workers in entrepreneurship, start-up costs weaken this relationship by depressing the marginal value of being an entrepreneur as a function of wealth. Countries with high start-up costs such as Italy, Spain and France have flatter wealth gradients.

Keywords: entrepreneurship; wealth; liquidity constraints; start-up costs (search for similar items in EconPapers)
JEL-codes: D31 E20 J62 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2007-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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