Saving to Overcome Borrowing Constraints: Implications for Small Business Entry and Exit

Abstract

This paper shows how a dynamic analysis of entrepreneurial choice, in which inter-temporal savings plans can be adjusted to build up capital, allows agents to overcome borrowing constraints. This casts fresh doubt on the notion that borrowing constraints deter entrepreneurial entry in the long run. Impatient agents are shown to voluntarily remain constrained indefinitely, whereas patient agents become entrepreneurs. The model also explains temporary and permanent closures of viable businesses. The model's predictions are consistent with evidence of greater savings behaviour by entrepreneurs.