Abstract
The existence of liquidity constraints for entrepreneurs has been challenged by the finding that business entry rates are invariant throughout most of the asset distribution and increase dramatically only at the top of this distribution. We reexamine the liquidity constraint hypothesis in three ways. First, we separately examine those who do and those who do not experience a job loss to reveal generally increasing entry rates through the wealth distribution for both groups, and show why these groups should be separately analyzed. Second, we use a two‐period simulation of the Evans and Jovanovic model to shows how exogenous wealth shocks can accurately identify the presence of liquidity constraints. Third, we provide new evidence from matched Current Population Survey data to show that housing appreciation measured at the MSA‐level is a significantly positive determinant of entry into self‐employment, after controlling for changes in local economic conditions.
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