Wealth, Enterprise and Credit Policy

Abstract

Empirical evidence suggests that capital-market constraints prevent low-wealth individuals from setting up in business. This paper shows this ®nding to be consistent with socially excessive lending and an interest-rate tax being welfare-improving. One feature of the model, banks' inability to identify entrepreneurial quality, leads to excessive bank lending and investment in low-return projects. The reduction in the probability of bankruptcy lowers the cost of borrowing and eliminates deadweight costs and hence promotes entry. If the incentive effects are suf®ciently large, wealth and the volume of entrepreneurial activity move together. A key result of the paper is to show that a market equilibrium in which there is a positive relationship between entry and the level of wealth is consistent with either subsidies to inactivity or taxes on interest raising welfare.

Mortgage Debt and Entrepreneurship

“…At first glance our main finding could also be consistent with theories based on credit constraints: leveraged home buyers may be prevented from taking on additional credit to start a business; however, as house values increase and LTV ratios are pushed down, housing becomes collateral that may be used to borrow and become an entrepreneur -as suggested, for instance, by two early studies using UK aggregate data (Black et al, 1996;De Meza and Webb, 1999). While such an interpretation would not alter our main message -i.e.…”

The Economics of Entrepreneurship: What We Know and What We Don’t

“…Many alternative explanations that are not based on borrowing constraints can also explain such a relationship, including decreasing absolute risk aversion (Cressy, 2000); a preference for self-finance; over-optimism; and over-investment considerations (de Meza and Webb, 1999). A more complete list and rationale appears in Parker (2004, Chap.…”

Taxes, start-up costs, and innovative entrepreneurship

“…When a new firm takes advantage of relaxed entry requirements, it may fail to signal that it has the certifications, resources, and accomplishments needed to succeed. Lower entry requirements can particularly undermine the ability of innovative entrepreneurs to gather resources (Hallen and Eisenhardt 2012), and it might be more difficult to obtain funding for innovative ideas (De Meza and Webb 1999). Banks do not know the quality of the entrepreneurs' projects due to asymmetric information and the high volume of entrepreneurs and may assume because of inexpensive entry that there are many low-ability entrepreneurs.…”