Small-Scale Business Survival and Inheritance: Evidence from Germany

Dorothea Schäfer and Oleksandr Talavera (oleksandr.talavera@gmail.com)

No 636, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: In this paper we investigate whether small-scale businesses face financial constraints that affect their survival. We develop a model of moral hazard in which financial constraints arise endogenously. The model predicts that higher private assets relax financial constraints and have a positive effect on the firm's probability of survival. We test this proposition using German Socio-Economic Panel (GSOEP) data, which cover the period 1984-2004. The release from financial constraints is measured by inheritance. The empirical analysis confirms that the entrepreneur has a higher propensity to stay in business when she inherits capital. This effect is particularly strong for entrepreneurs that switch from self-employment into wage employment. These results are consistent with hypothesis that financial frictions have a perceptible impact on bankruptcy among small business firms.

Keywords: Entrepreneurship; survival; financial constraints (search for similar items in EconPapers)
JEL-codes: G30 J20 L10 (search for similar items in EconPapers)
Pages: 28 p.
Date: 2006
New Economics Papers: this item is included in nep-bec and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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