A dynamic model of entrepreneurship with borrowing constraints: theory and evidence

By Francisco J. Buera. 2009

255 citations recorded by the source corpus.

Does wealth beget wealth and entrepreneurship, or is entrepreneurship mainly determined by an individual’s ability? A large literature studies the relationship between wealth and entry to entrepreneurship to inform this question. This paper shows that in a dynamic model, the existence of financial constraints to the creation of businesses implies a non-monotonic relationship between wealth and entry into entrepreneurship: the probability of becoming an entrepreneur as a function of wealth is increasing for low wealth levels—as predicted by standard static models—but it is decreasing for higher wealth levels. U.S. data are used to study the qualitative and quantitative predictions of the dynamic model. The welfare costs of borrowing constraints are found to be significant, around 6% of lifetime consumption, and are mainly due to undercapitalized entrepreneurs (intensive margin), rather than to able people not starting businesses (extensive margin).

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/61317eddd87bff5a1cc51aff824cb5dac512a602

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Citations in the corpus

Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso (2012, background): “…other classical formations, it is the realized sum of income cess that generates income from assets (Banerjee and Newman 1994, Barrett et al., 2011, Buera 2009), a non-convexity in the functional relationship between consumption and work capacity (Ray and Streufert 1993), or preference…”
Underinvestment in a Profitable Technology: The Case of Seasonal Migration in Bangladesh (2014, methodology): “The model is related to Deaton's buffer stock model, several models from the poverty trap literature (e.g. Banerjee 2004), and the entrepreneurship literature (e.g. Buera 2009; Vereshchagina and Hopenhayn 2009).”
QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool (2013, background): “In Kiyotaki and Moore (1997, 2008), Eisfeldt and Rampini (2006), Buera (2009), or Shourideh and ZetlinJones (2012), the key role of financial markets is that they allow funds to be reallocated from cash-rich, project-poor firms to cashpoor, project-rich firms.”
Macroeconomics and Household Heterogeneity (2016, background): “…accidental and intended bequests (as e.g. in De Nardi, 2004), the interaction between wealth accumulation and entrepreneurship (see Quadrini, 2000, Cagetti and De Nardi 2006 and Buera 2009) or idiosyncratic shocks to investment opportunities or its returns, as in Benhabib, Bisin and Zhu (2011).”
WEALTH INEQUALITY: DATA AND MODELS (2005, unknown): “There are many possible measures of wealth, the most appropriate one depending on the problem object of study.”
Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation? (2014, background): “The efficacy of self-financing then translates directly into long-run productivity losses from financial frictions: they are large if shocks are transitory and small if they are persistent.”
Location, search costs and youth unemployment: experimental evidence from transport subsidies (2018, unknown): “Therefore, as is the standard result for models of this kind (Bryan et al., 2014; Vereshchagina and Hopenhayn, 2009; Buera, 2009) S(x) crosses F (x) once from below.”
Entrepreneurship and income inequality (2018, unknown): “Future research could expand on our model by examining wealth inequality instead of income inequality, as prior studies suggest that entrepreneurship is a key element to understand wealth concentration (Buera, 2009; Quadrini, 1999).”
Saving and Wealth Inequality (2017, unknown): “Buera (2006, 2009) finds high saving behavior for entrepreneurs, both before and after entering entrepreneurship, thus indicating that people might save to both enter and expand one’s business.”
Financing Constraints and Entrepreneurship (2009, background): “In addition, dynamic models of occupational choice have aimed to characterize better the inter-temporal savings and consumption paths of individuals who eventually become entrepreneurs (Buera 2008).”
Financing Constraints, Firm Dynamics, Export Decisions and Aggregate productivity (2011, background): “Equation (11) implies that the firm pays no dividends and all revenues are reinvested; profits are distributed only once the firm stops its activity and liquidates its assets.”