Keywords: Entrepreneurship, wealth, liquidity constraints
Abstract: Numerous studies have found a positive relationship between wealth and entering
entrepreneurship, and interpret this as evidence of the existence of liquidity constraints.
However, recent research has shown that the relationship between wealth and entering
entrepreneurship may be non-linear and only significant for high-wealth households; this result
cannot be interpreted as evidence of liquidity constraints. Using data from the SCF, we construct
a proxy for wealth based on the household's home equity wealth at the time of the entrepreneurial
decision. The results provide further evidence that the relationship between wealth and entering
entrepreneurship is only significant for high-wealth households and that liquidity constraints do
not appear to bind for the majority of new entrepreneurs. Possible explanations for the
relationship between wealth and becoming an entrepreneur include lower risk aversion and
differences in the types of businesses started by high-wealth households.
Full paper (249 KB PDF)
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Last update: August 19, 2004