Cash Constraints and Business Start-Ups: Deutschmarks Versus Dollars

Douglas Holtz-Eakin,Harvey S Rosen

doi:10.2139/ssrn.1807995

Abstract

In this paper we analyze microdata to explore differences in the rates at which American and German workers leave their salaried jobs to become self-employed. We document that the rate of self-employment is lower in Germany than in the U.S., and the rate of transition from wage-earning to self-employment is lower as well. We find evidence that German workers face liquidity constraints that are more severe than those of their American counterparts. Further, the difference in transition rates cannot be attributed to observable differences between German and American workers.

Highlights

Self-employment is receiving substantial attention in both the U.S and Europe
Moving into the highest wealth bracket in Germany generates even more dramatic results, increasing the probability by 0.227, as opposed to the U.S figure of 0.0761. These findings mirror the elasticity calculations done using the coefficients in Table 3 and reinforce the basic conclusion: Transition rates to self-employment increase with wealth in both Germany and the United States, but the sensitivity is much higher in Germany, suggesting that liquidity constraints are more of an issue there. 3.3 Sources of Differences in the Transition Rates
We document that the rate of self-employment is lower in Germany than in the United States, and the rate of transition from wage-earning to self-employment is lower as well

Summary

Introduction

Self-employment is receiving substantial attention in both the U.S and Europe. The notion that self-employment is a good thing for the individual and for society has a long history in the U.S.; witness Horatio Alger’s stories and their echoes in today’s culture. A key issue in many of these studies is whether lack of access to capital inhibits the transition to self-employment This line of research mirrors the concern of many Europeans that their financial institutions are not conducive to the formation of small businesses. Blanchflower and Meyer [1994] compare transition rates to self-employment among the young in the U.S and Australia, using the U.S Survey of Income and Program Participation and the Australian Longitudinal Survey. In both papers, a limitation is that the survey questions in the two countries being studied are not necessarily comparable—the surveys were developed by different organizations for different purposes. We conclude with a summary and suggestions for future research

Self-Employment in Germany and the United States

Transitions to Self-Employment

Conclusions

A Monte Carlo Comparison of Tests for Cointegration in Panel Data