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Wealth, Industry and the Transition to Entrepreneurship

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Author Info
Berna Demiralp (Old Dominion University, Department of Economics)
Johanna Francis (Fordham University, Department of Economics)

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Abstract

Although the debate about the effect of wealth on entrepreneurship is now almost two decades old, there is little consensus among researchers about the significance of wealth as a determinant for self-employment. We re-visit the relationship between wealth and entrepreneurship using data from the National Longitudinal Survey of Youth. Like Hurst and Lusardi (2004), our results suggest the relationship between wealth and the probability of entering entrepreneurship is nonlinear. However, unlike Hurst and Lusardi, we find the probability of entrepreneurship increases at an increasing rate with wealth, starting at lower quantiles of the wealth distribution. We also observe that the aggregate relationship masks differences among entrepreneurs with respect to their industry. While high capital requirement industries and professional services display a convex relationship between wealth and the probability of self-employment, low capital requirement industries display a concave relationship. Since we find a positive relationship between wealth and the probability of entering entrepreneurship at lower quantiles of the wealth distribution, it is critical to check whether this relationship is caused by wealth endogeneity. In order to account for the possible endogeneity of wealth we instrument for wealth using changes in housing equity and the value of unexpected inheritances. The results of instrumental variable estimation reveal that there is no significant relationship between wealth and entering entrepreneurship for the full sample as well as for each of the three industries.

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Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2008-09.

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Date of creation: 2008
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Handle: RePEc:frd:wpaper:dp2008-09

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Related research
Keywords: Entrepreneur; wealth; industry; liquidity constraints;

Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Kameliia Petrova, 2005. "Part-Time Entrepreneurship and Wealth Effects: New Evidence from the Panel Study of Entrepreneurial Dynamics," Microeconomics 0510006, EconWPA, revised 03 Nov 2005. [Downloadable!]
  2. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Robert W. Fairlie & Harry A. Krashinsky, 2006. "Liquidity Constraints, Household Wealth, and Entrepreneurship Revisited," IZA Discussion Papers 2201, Institute for the Study of Labor (IZA). [Downloadable!]
  4. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April. [Downloadable!] (restricted)
  5. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June. [Downloadable!] (restricted)
  6. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February. [Downloadable!] (restricted)
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  7. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May. [Downloadable!] (restricted)
  8. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
  9. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
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