Entrepreneurial Decisions and Liquidity Constraints

Douglas Holtz-Eakin, David Joulfaian () and Harvey Rosen ()

No 4526, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the role of liquidity constraints in the formation of new entrepreneurial enterprises. The basic empirical strategy is to determine whether an individual's wealth affects the probability of becoming an entrepreneur, and the conditional amounts of depreciable assets, ceteris paribus. If so, liquidity constraints are likely to be present. To be successful, such a research strategy requires a measure of asset variation that is both precisely measured and exogenous to the entrepreneurial decision. Our data are uniquely well-suited for this purpose. The sample consists of the 1981 and 1985 federal income tax returns of a group of people who received inheritances in 1982 and 1983, along with information on the size of those inheritances from a matched set of estate tax returns. Hence, we can examine how the exogenous receipt of capital affects the decision to become an entrepreneur and important financial characteristics of new enterprises. Our results suggest that the size of the inheritance has a substantial effect on the probability of becoming an entrepreneur, and that conditional on becoming an entrepreneur, the size of the inheritance has a statistically significant and quantitatively important effect on the amount of capital employed. These findings are consistent with the presence of liquidity constraints.

JEL-codes: D21 (search for similar items in EconPapers)
Date: Written
Note: PE
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Related works:
Working Paper: Entrepreneurial Decisions and Liquidity Constraints (1992)
Working Paper: Entrepreneurial Decisions and Liquidity Constraints (1992)
Journal Article: Entrepreneurial Decisions and Liquidity Constraints (1994)
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