2004 LiquidityConstraintsHouseholdWe
- (Hurst & Lusardi, 2004) ⇒ Erik Hurst, and Annamaria Lusardi. (2004). “Liquidity Constraints, Household Wealth, and Entrepreneurship.” JSTOR. doi:10.1086/381478
Subject Headings: Household Wealth
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Abstract
The propensity to become a business owner is a nonlinear function of wealth. The relationship between wealth and entry into entrepreneurship is essentially flat over the majority of the wealth distribution. It is only at the top of the wealth distribution — after the ninety-fifth percentile — that a positive relationship can be found. Segmenting businesses into industries with high–and low–starting capital requirements, we find no evidence that wealth matters more for businesses requiring higher initial capital. When using inheritances as an instrument for wealth, we find that both past and future inheritances predict current business entry, showing that inheritances capture more than simply liquidity. We further exploit the regional variation in house prices and find that households that lived in regions in which housing prices appreciated strongly were no more likely to start a business than households in other regions.
1.Introduction
Most important, household wealth proxies for more than household liquidity; the traits that render some households more likely to accumulate wealth in nonbusiness forms may also make these households more likely to start a business. To avoid this potential endogeneity problem, we instrumented household wealth with proxies for changes in liquidity. Several authors have found that the propensity to start a business responds strongly to inheritances received in the recent past (Holtz-Eakin, Joulfaian, and Rosen 1994; Blanchflower and Oswald 1998). Given that the receipt of an inheritance is not a random event, inheritances likely proxy for more than just liquidity. If inheritances proxy solely for liquidity, inheritances received in the past should predict curliquidity constraints
rent business entry, whereas future inheritances should not. We find that inheritances received in the future predict current business formation equally as well as inheritances received in the recent past. Thus inheritances are a rather poor instrument for changes in household liquidity.
- A. Household Wealth and the Transition into Entrepreneurship
- Base Results
In this subsection, we explore the relationship between household wealth and the probability of starting a business. We begin by estimating a probit model of the transition into business ownership in the subsequent year as a function of household wealth and several other controls. These controls include a quadratic in age; a series of education, race, and family structure dummies; a quadratic in household labor income; dummies for whether the household head is currently unemployed or had been unemployed anytime in the prior five years; and a dummy for whether the household had been a business owner anytime in the
prior five years.
Household wealth is defined as the sum of savings and checking accounts, bonds, stocks, individual retirement accounts, housing equity, other real estate, and vehicles, minus all debt.
References
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| Author | volume | Date Value | title | type | journal | titleUrl | doi | note | year | |
|---|---|---|---|---|---|---|---|---|---|---|
| 2004 LiquidityConstraintsHouseholdWe | Erik Hurst Annamaria Lusardi | Liquidity Constraints, Household Wealth, and Entrepreneurship | 10.1086/381478 | 2004 |