Divergent Fortunes: Income Diversification, Rising Older Entrepreneurship and Falling Younger Entrepreneurship

Abstract

Entrepreneurship has declined among younger households, those headed by somebody less than 50 years old, while it has increased among older households over the past two decades. We explore whether this divergence in entrepreneurial activity could be linked to different experiences with income diversification from capital income and retirement and annuity income. Using descriptive and instrumental variable regressions based on data from the Federal Reserve’s triennial Survey of Consumer Finances (SCF), we conclude that older households’ entrepreneurial activity has become more responsive to income diversification while younger households’ has become less responsive over time. In further examinations, we rule out three potential alternative explanations – changes in economic pressures, in liquidity constraints and in nonpecuniary rewards – for the divergent entrepreneurship trends. Our results suggest that more access to income unrelated to risky business income, especially among younger households, could support more entrepreneurship in the future.