Liquidity Constraints, Household Wealth, and Entrepreneurship

TLDR

The propensity to become a business owner is essentially flat across most of the wealth distribution, with a positive relationship only above the 95th percentile. We find that wealth does not influence entrepreneurship more for high‑capital industries, that inheritances predict business entry beyond liquidity, and that regional housing price appreciation does not increase business‑starting likelihood.

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.