Liquidity Constraints, Household Wealth, and Entrepreneurship Revisited

By R. Fairlie, Harry Krashinsky. Social Science Research Network, 2012

291 citations recorded by the source corpus.

A large body research shows a positive relationship between wealth and entrepreneurship and interprets the relationship as providing evidence of liquidity constraints. Recently, however, the liquidity constraint interpretation has been challenged because of the finding that the relationship between business entry rates and assets is flat throughout most of the asset distribution and only rises dramatically after this point (Hurst and Lusardi 2004). We reexamine the liquidity constraint hypothesis in three ways. First, we demonstrate that examining the relationship separately for those who experience a job loss and those who do not reveals generally increasing entry rates through the wealth distribution for both groups. Based on the entrepreneurial choice model of Evans and Jovanovic (1989), these two groups face different incentives, and thus have different solutions to the entrepreneurial decision. We also find evidence of a stronger relationship between entrepreneurship and a different measure of wealth – net housing equity – for the two groups. Second, we examine the liquidity constraint hypothesis using a two-period simulation model that extends the Evans and Jovanovic (1989) model. The model shows how exogenous wealth shocks can be used to accurately identify the presence of liquidity constraints even allowing for endogenous saving and correlated abilities. Third, we provide new evidence from matched Current Population Survey (1993-2004) data to study whether changes in housing prices affect self-employment entry.

Subfields: Economics and Econometrics, Management of Technology and Innovation

View Paper: https://www.semanticscholar.org/paper/9c9d46dcaa858e776d6a24a4957aefec7b7bf7d6

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

In Management of Technology and Innovation

Citations in the corpus

Immigration and Entrepreneurship (2015, background): “…a few examples, see Evans and Jovanovic (1989), Evans and Leighton (1989), Holtz-Eakin et al. (1994), Black et al. (1996), Lindh and Ohlsson (1996), Blanchflower and Oswald (1998), Dunn and Holtz-Eakin (2000), Taylor (2001), Zissimopoulos, Karoly, and Gu (2009), and Fairlie and Krashinsky (2012).”
Individual Determinants of Self-Employment Entry – What Do We Really Know? (2013, unknown): “For instance, Fairlie and Krashinsky (2012) advocate separate evaluations for situations in which self-employment emerges as an opportunity and those in which it occurs by necessity.”
House Prices, Collateral and Self-Employment (2013, background): “…the same time, housing wealth in particular has been shown to be an important factor in the funding of business start-ups (see Fan and White, 2003; Fairlie and Krashinsky, 2012; Fort, Haltiwanger, Jarmin, and Miranda, 2012; Kleiner, 2013; Corradin and Popov, 2013; and Schmalz, Sraer, and Thesmar,…”
The Capital Structure Decisions of New Firms (2010, unknown): “scoreij = α + βj + γ1Fij + γ2Kij + i (2)”
Why are some people more likely to become small-businesses owners than others: Entrepreneurship entry and industry-specific barriers (2014, result): “However, subsequent research using IV estimation casts doubt on the Hurst-Lusardi results, finding strong positive relationships between wealth and entrepreneurial entry (Disney & Hathergood, 2009; Fairlie & Krashinsky, 2012).”
Entrepreneurship in the UK (2007, unknown): “Indeed, Fairlie and Krashinsky (2006) examined this issue in some detail.”
Capital is not enough: opportunity entrepreneurship and formal institutions (2018, unknown): “2.2 The moderating role of economic institutions in financial capital and entrepreneurship Previous studies suggest that financial capital2 is a strong determinant of entrepreneurship (Acs and Szerb 2007; Fairlie and Krashinsky 2012).”
Housing Price and Entrepreneurship in China (2014, unknown): “Most studies do find a positive relationship between wealth and business entry (Evans and Jovanovic, 1989; Hurst and Lusardi, 2004; Paulson and Townsend, 2004; Djankov et al., 2006; Fairlie and Krashinsky, 2012; Wang, 2012).”