Self-Employment, Wealth and Start-up Costs: Evidence from a Financial Crisis
Financial
constraints affect in important ways the decision of individuals to become entrepreneur
(self-employed). This implicitly suggests a positive relation between the propensity
of individuals to become entrepreneur and their personal wealth. Recent theoretical
work and empirical evidence confirm this hypothesis. More interestingly, it has
been shown that the slope of the entrepreneurship-wealth relationship increases
with the extent of liquidity constraints and flattens with the magnitude of
start-up costs. Using individual level data from 3 surveys (SHARE, ELSA and
HRS) in Europe and the United States, as well as the World Bank’s Doing Business
data, this paper empirically zeroes in on the impact of start-up costs on the
self-employment-wealth relationship. The dynamic nature of the data enables us
to investigate potential effects of the last global financial crisis. Results
confirm the strong positive relationship between the entrepreneurial choice and
wealth, as well as the negative effect stemming from the increase in start-up
costs. Interestingly, although there is no strong evidence that wealth in
itself played a bigger role during the crisis, we find that the negative impact
of start-up costs on wealth proved to be significantly pronounced during the last
crisis.
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