Wealth, Human Capital and the Transition to Self-Employment

Abstract

Although the debate about the effect of wealth on entrepreneurship or self-employment is now almost two decades old, there is little consensus among researchers about the significance of wealth as a determinant for self-employment. In this paper, we shift the focus from whether potential entrepreneurs, as a group, are credit constrained, to whom among potential entrepreneurs is credit constrained. We consider the impact of education and experience on the probability of choosing self-employment, in an environment where individuals may be credit constrained. We find that for individuals with low human capital, wealth and entrepreneurial entry are negatively related, while wealth has no statistically significant effect on entry for individuals with medium to high human capital. This result is puzzlingly at odds with the classic Evans-Jovanovic model for entrepreneurial entry. We discuss one possibility for reconciling the two.