Financial literacy and entrepreneurial risk aversion

Abstract

We explore the interaction effects of financial literacy and risk aversion on becoming an entrepreneur. We use two independent datasets to provide evidence that the difference in risk aversion between entrepreneurs and wage earners is conditional on their financial literacy. First, we use the De Nederlandsche Bank’s Household Survey and find lower risk aversion only for entrepreneurs with lower financial literacy. The difference disappears for entrepreneurs with higher financial literacy. Second, we show that the results are robust in a fully incentivized field experiment with high-tech startups from three European countries. The results reveal a potential channel of how financial literacy can promote entrepreneurship.