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Liquidity Constraints, Household Wealth, and Self-Employment The Case of Older Workers

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  • Julie Zissimopoulos
  • Lynn A. Karoly
  • Qian Gu

Abstract

Evidence of liquidity constraints affecting entrepreneurship includes increasing rates of business formation with increases in household wealth and no relationship between the likelihood of business formation and wealth at high wealth levels. Using longitudinal data from the Health and Retirement Study on workers over age 50 and employing probit regressions with a non-linear specification of household wealth and liquid wealth, the authors find the relationship between wealth and business formation is consistent with this pattern. The paper also finds that wealth matters more for the formation of businesses requiring high starting capital. Employing the availability of a lump-sum distribution option (LSO) of an employer-provided pension plan as a new proxy for liquidity, the results show that workers with an LSO are more likely than workers with a pension and without an LSO to transition into self-employment. This provides further evidence of the existence and importance of liquidity constraints.

Suggested Citation

  • Julie Zissimopoulos & Lynn A. Karoly & Qian Gu, 2010. "Liquidity Constraints, Household Wealth, and Self-Employment The Case of Older Workers," Working Papers WR-725, RAND Corporation.
    • Handle: RePEc:ran:wpaper:wr-725
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    References listed on IDEAS

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    1. Victor R. Fuchs, 1982. "Self-Employment and Labor Force Participation of Older Males," Journal of Human Resources, University of Wisconsin Press, vol. 17(3), pages 339-357.
    2. Robert W. Fairlie & Harry A. Krashinsky, 2012. "Liquidity Constraints, Household Wealth, And Entrepreneurship Revisited," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 58(2), pages 279-306, June.
    3. Fairlie, Robert W, 1999. "The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 80-108, January.
    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.
    5. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1994. "Entrepreneurial Decisions and Liquidity Constraints," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 334-347, Summer.
    6. Steven F. Venti & David A. Wise, 2001. "Choice, Chance, and Wealth Dispersion at Retirement," NBER Chapters, in: Aging Issues in the United States and Japan, pages 25-64, National Bureau of Economic Research, Inc.
    7. Zissimopoulos, Julie M. & Karoly, Lynn A., 2007. "Transitions to self-employment at older ages: The role of wealth, health, health insurance and other factors," Labour Economics, Elsevier, vol. 14(2), pages 269-295, April.
    8. Michael Hurd & F. Thomas Juster & James P. Smith, 2003. "Enhancing the Quality of Data on Income: Recent Innovations from the HRS," Journal of Human Resources, University of Wisconsin Press, vol. 38(3).
    9. Jianakoplos, Nancy Ammon & Bajtelsmit, Vickie L., 2002. "Dual private pension households and the distribution of wealth in the United States," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(2), pages 131-155, July.
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    1. Robert W. Fairlie & Harry A. Krashinsky, 2012. "Liquidity Constraints, Household Wealth, And Entrepreneurship Revisited," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 58(2), pages 279-306, June.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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