Household Wealth and Entreprenership: Is There a Link?

Abstract

In the absence of correlation between net wealth and entrepreneurial talent, net wealth should have an explanatory power in the decision of becoming entrepreneurs only for households that are financially constrained. Further, the importance of net wealth should be higher for the poorest households. I test these theoretical predictions for the Italian case, using the Survey of Household Income and Wealth. The evidence is that household initial net wealth is important in explaining the decision of becoming entrepreneurs and its relevance is decreasing as far as the household net wealth increases. Moreover, the effect of net wealth is stronger when legal enforcement of the loan contract is worse as predicted by the model. When instrumented, net wealth still explains the occupational choice, with a stronger effect for the poorest households. Finally, conditional on becoming entrepreneurs, the initial net wealth does not significantly affect the size of the business. In summary, it seems that imperfections in capital markets can essentially induce people to pile up assets in order to facilitate the decision of becoming entrepreneurs. However, conditional on this decision, the entrepreneurs seem to reach the optimal size of the business.