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Mortgage debt and entrepreneurship

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  • Bracke, Philippe
  • Hilber, Christian A.L.
  • Silva, Olmo

Abstract

We study the link between mortgage debt and entrepreneurship using a model of occupational choice and housing tenure in a setting where loans are recourse—like in the UK and several US states. Our model shows that as long as the mortgage interest rate exceeds the risk-free rate: (i) mortgage debt diminishes the likelihood of entrepreneurship by amplifying risk aversion; and (ii) the negative relation between mortgage debt and entrepreneurship increases with income volatility. Our model also shows that the link between housing equity and entrepreneurship is ambiguously signed because of competing portfolio and wealth effects. We use the British Household Panel Survey to test and confirm the model predictions, and deal with unobservable heterogeneity employing three research designs—individual fixed effects, housing-spell fixed effects, and instrumental variables. A one standard deviation increase in leverage reduces the probability of entrepreneurship by 10–20 percent.

Suggested Citation

  • Bracke, Philippe & Hilber, Christian A.L. & Silva, Olmo, 2018. "Mortgage debt and entrepreneurship," Journal of Urban Economics, Elsevier, vol. 103(C), pages 52-66.
    • Handle: RePEc:eee:juecon:v:103:y:2018:i:c:p:52-66
    DOI: 10.1016/j.jue.2017.10.003
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    Cited by:

    1. Bracke, Philippe & Hilber, Christian A.L. & Silva, Olmo, 2018. "Mortgage debt and entrepreneurship," Journal of Urban Economics, Elsevier, vol. 103(C), pages 52-66.
    2. Saleem Bahaj & Angus Foulis & Gabor Pinter, 2020. "Home Values and Firm Behavior," American Economic Review, American Economic Association, vol. 110(7), pages 2225-2270, July.
    3. Christian A. L Hilber & Jan Rouwendal & Wouter Vermeulen, 2021. "Local economic conditions and the nature of new housing supply," Journal of Economic Geography, Oxford University Press, vol. 21(3), pages 339-366.
    4. Jensen, Thais Laerkholm & Leth-Petersen, Søren & Nanda, Ramana, 2022. "Financing constraints, home equity and selection into entrepreneurship," Journal of Financial Economics, Elsevier, vol. 145(2), pages 318-337.
    5. Hilber, Christian A. L. & Schöni, Olivier, 2016. "Housing policies in the United Kingdom, Switzerland, and the United States: lessons learned," LSE Research Online Documents on Economics 72818, London School of Economics and Political Science, LSE Library.
    6. Honjo, Yuji & Ono, Arito & Tsuruta, Daisuke, 2024. "The effect of physical collateral and personal guarantees on business startups," Journal of Economics and Business, Elsevier, vol. 130(C).
    7. Walther Reina Gutiérrez & Claudia Inés Sepúlveda Rivillas & Gabriel Jaime González Uribe, 2017. "Análisis semiparametrico de los factores asociados a la sostenibilidad de los emprendimientos," Revista Facultad de Ciencias Económicas, Universidad Militar Nueva Granada, vol. 26(1), pages 163-180, December.
    8. Han, Bing & Han, Lu & Zhou, Zhengyi, 2020. "Housing Market and Entrepreneurship: Micro Evidence from China," MPRA Paper 102597, University Library of Munich, Germany, revised 17 Aug 2020.
    9. Kerr, Sari Pekkala & Kerr, William R. & Nanda, Ramana, 2022. "House prices, home equity and entrepreneurship: Evidence from U.S. census micro data," Journal of Monetary Economics, Elsevier, vol. 130(C), pages 103-119.
    10. Gabor Pinter & Angus Foulis & Saleem Bahaj, 2016. "The Residential Collateral Channel," 2016 Meeting Papers 502, Society for Economic Dynamics.
    11. Gabriel M. Ahlfeldt & Wolfgang Maennig, 2019. "Gewinner und Verlierer von Stadtentwicklung: Ein Plädoyer für mehr Wohneigentum [Winners and losers of urban development: A plea for more home ownership]," Zeitschrift für Immobilienökonomie (German Journal of Real Estate Research), Springer;Gesellschaft für Immobilienwirtschaftliche Forschung e. V., vol. 5(1), pages 111-130, November.
    12. Harding, John P. & Rosenthal, Stuart S., 2017. "Homeownership, housing capital gains and self-employment," Journal of Urban Economics, Elsevier, vol. 99(C), pages 120-135.
    13. Benedikt Vogt & Wolter Hassink & Matteo Millone & Remco Mocking, 2021. "Homeowners have easier and cheaper access to business credit," CPB Discussion Paper 420, CPB Netherlands Bureau for Economic Policy Analysis.
    14. Hassink, Wolter & Millone, Matteo & Mocking, Remco & Vogt, Benedikt, 2021. "Home Ownership and Home Equity Promote Entrepreneurial Activity," IZA Discussion Papers 14170, Institute of Labor Economics (IZA).
    15. Innessa Colaiacovo & Margaret Dalton & Sari Pekkala Kerr & William R. Kerr, 2022. "The Transformation of Self Employment," Working Papers 22-03, Center for Economic Studies, U.S. Census Bureau.
    16. Liu, Shimeng & Zhang, Sisi, 2021. "Housing wealth changes and entrepreneurship: Evidence from urban China," China Economic Review, Elsevier, vol. 69(C).
    17. Hembre, Erik & Dantas, Raissa, 2022. "Tax incentives and housing decisions: Effects of the Tax Cut and Jobs Act," Regional Science and Urban Economics, Elsevier, vol. 95(C).
    18. Xiaofen Yu & Dingpei Hu & Mingzhi Hu, 2024. "Unveiling the impact of housing debt on entrepreneurship: Evidence from China," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 11(2), May.
    19. Benedikt Vogt, 2021. "Homeowners have easier and cheaper access to business credit," CPB Discussion Paper 420.rdf, CPB Netherlands Bureau for Economic Policy Analysis.
    20. Szumilo, Nikodem & Vanino, Enrico, 2021. "Mortgage affordability and entrepreneurship: Evidence from spatial discontinuity in Help-to-Buy equity loans," Journal of Business Venturing, Elsevier, vol. 36(4).
    21. Brent W. Ambrose & Patric H. Hendershott & David C. Ling & Gary A. McGill, 2022. "Homeownership and taxes: How the TCJA altered the tax code's treatment of housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(5), pages 1167-1200, September.
    22. Bunn, Philip & Chadha, Jagjit & Lazarowicz, Thomas & Millard, Stephen & Rockall, Emma, 2021. "Household debt and labour supply," Bank of England working papers 941, Bank of England.

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    More about this item

    Keywords

    Entrepreneurship; Mortgage debt; Leverage; Risk aversion;
    All these keywords.

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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