Entrepreneurship, Frictions, and Wealth

Abstract

Although the role of financial constraints on entrepreneurial choices has received considerable attention, the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth concentration and, conversely, the distribution of wealth affects entrepreneurial choices in the presence of borrowing constraints. We construct a model that matches wealth inequality very well, for both entrepreneurs and non-entrepreneurs, and find that more restrictive borrowing constraints generate less wealth concentration, but also reduce average firm size, aggregate capital, and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only, there would be fewer large firms, fewer entrepreneurs, and less aggregate capital, but also less wealth concentration.

Access to credit and comparative advantage

“…The experiment may also be interpreted as moving to a more uneven distribution of the capital endowment among workers and potential entrepreneurs. We find that not only the level but also the distribution of wealth is important for outcomes which is in line with a recent literature in macroeconomics (see Cagetti andDe Nardi 2006 andQuadrini 2009). Regarding legal institutions, the law and finance literature has emphasized the importance of tight investor protection, accounting standards and the quality of commercial law.…”

“…This is consistent with a prominent literature in finance which reports financially constrained investment opportunities as a sector characteristic (see Rajan andZingales 2008 andChaney 2013). In line with recent literature in macroeconomics (see Cagetti andDe Nardi 2006 andQuadrini 2009), not only capital abundance, but also the distribution of capital across workers and entrepreneurs matters and interacts with financing constraints to determine entry/exit, production, trade and welfare.…”

The impact of personal bankruptcy law on entrepreneurship

“…For instance, an increase in the level of entrepreneurship means fewer workers in the corporate sector, so the wage rate in the corporate sector would rise, which discourages entrepreneurship by increasing the opportunity cost. Many have argued (Cagetti and De Nardi 2006;Evans and Jovanovic 1989;Evans and Leighton 1989) that more potential entrepreneurs in an environment with default lead to higher stock of capital, because entrepreneurs want to save more proportionally to avoid borrowing constraints. This leads to a lower equilibrium risk-free interest rate, which encourages entrepreneurship (this effect amplifies my result, as a higher level of entrepreneurship encourages more households to run businesses).…”

“…As discussed in many studies, the value of capital lost in the liquidation process can be substantial: the average liquidation costs cited range from 36.5% to 45% (Shleifer and Vishny 1992). A hand of theoretical papers studied default and entrepreneurship: Cagetti and De Nardi (2006) study a model of similar occupation choices and find that tighter borrowing constraints generate less wealth concentration and reduce average firm size, aggregate capital and the fraction of entrepreneurs. In their model, however, there is no trade-off between insurance effect and borrowing cost effect, because production is riskless in their model, such that limited commitment only limits borrowing and default does not occur in the equilibrium.…”

Politics and entrepreneurship in the US

“…7 Another strand of the literature focuses on the determinants of becoming an entrepreneur. These factors include financial constraints (Holtz-Eakin et al 1994, Cagetti and De Nardi 2006, Fairlie and Krashinsky 2012, taxes (Gentry andHubbard 2000, Cullen andGordon 2007), family background and race (Hout andRosen, 2000, Fairlie 2008), immigration status (Hunt 2010), entry regulations (Dajkov et al 2002, Branstetter et al 2014, risk attitudes (Blanchflower 1998, Skriabikova et al 2014) and macroeconomic conditions (Fairlie 2013, Klapper et al 2014). Our paper complements these studies by investigating whether politics has been a significant determinant of entrepreneurial activity in the US.…”