No. 719 - Household wealth and entrepreneurship: is there a link?

In the absence of any correlation between wealth and entrepreneurial talent, initial net wealth should have an explanatory power in the decision to become an entrepreneur only for households that are financially constrained; further, its importance should decrease with wealth. I test these theoretical predictions for the Italian case, using the Survey of Household Income and Wealth. The evidence is that household's initial wealth is indeed important in the decision to become an entrepreneur and its effect is lower for the richest households. When net wealth is instrumented, the results are similar. Furthermore, the effect of net wealth is stronger when legal enforcement of the loan contract is weaker, as also predicted by the model. Finally, conditional on becoming entrepreneurs, initial household wealth does not significantly affect the size of the business. In summary, it seems that imperfections in capital markets can induce people to accumulate assets in order to facilitate the decision to become entrepreneurs.