Entrepreneurial Decisions and Liquidity Constraints

Author
Keywords
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 and interest deductions, 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 l985 federal tax returns of a group of people who received
inheritances in 1982 and l983, 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 little effect on the probability of
becoming an entrepreneur, but 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. The conditional elasticity is 0.45. Thus, liquidity constraints matter, but
not in the fashion suggested in some earlier investigations.

Year of Publication
1992
Number
299
Date Published
02/1992
Publication Language
eng
Citation Key
Rand Journal of Economics, Vol 25, No 2, Summer 1994
URL
Working Papers