Working Paper: NBER ID: w25350
Authors: Ross Levine; Yona Rubinstein
Abstract: We study the effects of ability and liquidity constraints on entrepreneurship. We develop a three sector Roy model that differentiates between entrepreneurs and other self-employed to address puzzling gaps that have emerged between theory and evidence on entry into entrepreneurship. The model predicts—and the data confirm—that entrepreneurs are positively selected on highly-remunerated human capital, but other self-employed are negatively selected on those same abilities; entrepreneurs are positively selected on collateral, but other self-employed are not; and entrepreneurship is procyclical, but self-employment is countercyclical.
Keywords: Entrepreneurship; Self-Employment; Human Capital; Liquidity Constraints
JEL Codes: E32; J24; L26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher human capital traits (J24) | greater likelihood of becoming an entrepreneur (L26) |
| lower human capital traits (J24) | increase likelihood of being in other self-employment (L26) |
| more collateral (G32) | more likely to become entrepreneurs (L26) |
| entrepreneurs are procyclical (E32) | increases during economic upturns (E32) |
| self-employment is countercyclical (E32) | increases during economic downturns (E32) |
| liquidity constraints (E41) | significant effects on entrepreneurship (L26) |
| liquidity constraints (E41) | no effect on entry into other forms of self-employment (L26) |
| cyclicality of entrepreneurship (E32) | influenced by demand for salaried workers and liquidity conditions (J29) |