A Dynamic Model of Entrepreneurship with Borrowing Constraints: Theory and Evidence

Francisco J. Buera
Publication Type: 
Papers
Journal Name: 
Annals of Finance
Journal Volume: 
5
Journal Number: 
3
Pages: 
443-464
Publication Year: 
2009

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).

JEL Codes: 
D91, D92, G00 , J22 , J23
Region: 
United States and Canada
Country: 
USA
Topic: 
Economic Modeling
Topic: 
Labor Markets
Topic: 
Enterprise
Topic: 
Consumption
Topic: 
Income and Wealth
Topic: 
Credit
Topic: 
Occupational Choice