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Title: Sticking It Out: Entrepreneurial Survival and Liquidity Constraints
Authors: Holtz-Eakin, Douglas
Joulfaian, David
Rosen, Harvey
Keywords: entrepreneurship
liquidity constraints
Issue Date: 1-Oct-1993
Citation: Journal of Political Economy, February 1994
Series/Report no.: Working Papers (Princeton University. Industrial Relations Section) ; 319
Abstract: We examine why some individuals survive as entrepreneurs and others do not. In addition. we analyze the growth of entrepreneurial enterprises, conditional on surviving. Our focus is on the role of access to capital--to what extent do liquidity constraints increase the likelihood of entrepreneurial failure? The empirical strategy is based on the following logic: If entrepreneurs cannot borrow to attain their profit-maximizing levels of capital, then those entrepreneurs who have substantial personal financial resources will be more successful than those who do not. The data consist of the 1981 and 1985 federal individual income tax returns of a group of people who received inheritances. These data allow us to identify those individuals who were sole proprietors in 1981, and to determine the extent to which the decision to remain a sole proprietor was influenced by the magnitude of the inheritance-induced increase in liquidity. The results are consistent with the notion that liquidity constraints exert a noticeable influence on the viability of entrepreneurial enterprises. For example, a $150,000 inheritance increases the probability that an individual will continue as a sole proprietor by 1.3 percentage points, and conditional on surviving, the receipts of the enterprise increase by almost 20 percent.
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