Abstract

This paper presents the first attempt to incorporate home-ownership and house price dynamics in a model of entrepreneurial choice. Due to prospects of limits on the amount of borrowing, housing stock has a collateral value component, beyond the value derived from the direct consumption of housing services. House prices then affect the equity value individuals can extract from their home to finance entrepreneurial activity. We test the implications of the model using SIPP, a large individual-level survey dataset. We provide evidence that higher home equity increases the probability of transition into entrepreneurship, while higher household leverage has a significantly positive effect on business equity ownership. These effects are stronger in ”hot” housing markets where agents expect house prices to keep increasing in the future.

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