Liquidity Constraints, Wealth Accumulation and Entrepreneurship

TitleLiquidity Constraints, Wealth Accumulation and Entrepreneurship
Publication TypeReport
Year of Publication2002
AuthorsHurst, E, Lusardi, A
InstitutionChicago Business School
KeywordsEmployment and Labor Force, Net Worth and Assets
Abstract

There exist many government programs in the U.S. aimed to foster entrepreneurship and, in particular, to relax credit restrictions new entrepreneurs may face. However, many leading empirical works have found that there exists a positive correlation between wealth and starting a business and argued that binding liquidity constraints prevent many household from becoming business owners. In this paper, we examine closely the relationship between weath accumulation and entrepreneurship. We argue that, if liquidity constraints are binding, the incremental effect of a dollar of wealth on the probability to start a business should decrease as welath increases. Using data from several surveys, we can reject the hypothesis that liquidity constraints are the cause of the observed wealth-business start-up correlation. We find that only a small group of extremely wealthy households (top 3 of the wealth distribution) drives the correlation between wealth and becoming a business owner. Additionally, we find that there is no correlation between initial wealth (and wealth changes) and the propensity to become a business owner among businesses that require high starting capital and among groups that are ex-ante more likely to be liquidity constrained, such as young, black, or female households. Furthermore, when using a more appropriate measure of liquidity and accessibility of funds, such as receiving insurance settlements or capital gains on home equity, we find that the positive correlation between wealth and starting a business vanishes. Finally, we examine the importance of family wealth in affecting the child's propensity to start a business as well as business survival. We again show that it is mainly those families at the very top of the wealth distribution that are responsible for driving the positive relationship between wealth and business start-up and wealth and business survival. Taken together, our evidence casts severe doubts that the mechanism at play in explaining the positive relationship between wealth and business start-up had much to do with the existence of liquidity constraints.

Endnote Keywords

Wealth/Capital/Business start-up

Endnote ID

9992

Citation Key5502