Abstract
Does wealth beget wealth and entrepreneurship, or is entrepreneurship mainly determined by an individual’s ability? A large literature studies the relationship between wealth and entry to entrepreneurship to inform this question. This paper shows that in a dynamic model, the existence of financial constraints to the creation of businesses implies a non-monotonic relationship between wealth and entry into entrepreneurship: the probability of becoming an entrepreneur as a function of wealth is increasing for low wealth levels—as predicted by standard static models—but it is decreasing for higher wealth levels. U.S. data are used to study the qualitative and quantitative predictions of the dynamic model. The welfare costs of borrowing constraints are found to be significant, around 6% of lifetime consumption, and are mainly due to undercapitalized entrepreneurs (intensive margin), rather than to able people not starting businesses (extensive margin).
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I thank Fernando Alvarez, Gary Becker, Pierre-André Chiappori, Mariacristina De Nardi, Xavier Gine, James Heckman, Boyan Jovanovic, Robert Townsend, and Iván Werning for valuable comments and suggestions. I also benefited from comments of participants at various seminars.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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Buera, F.J. A dynamic model of entrepreneurship with borrowing constraints: theory and evidence. Ann Finance 5, 443–464 (2009). https://doi.org/10.1007/s10436-009-0121-2
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DOI: https://doi.org/10.1007/s10436-009-0121-2