a dynamic model of entrepreneurship with borrowing.pdf

A Dynamic Model of Entrepreneurship with Borrowing Constraints: Theory and Evidence Francisco J. Buera Northwestern University August 2005 Abstract Do Önancial constraints have persistent e§ects on the creation of busi- nesses, or should we expect that forward-looking individuals always save their way out of credit constraints? This paper studies the interaction between savings and the decision to become an entrepreneur in a multi- period model with borrowing constraints to answer this question. The model has a simple threshold property: able individuals who start with wealth above a threshold save to become entrepreneurs, while those who start below this threshold remain wage earners forever. The theory gen- erates a well-deÖned transition from wage earners to entrepreneurs ñ a major focus of recent empirical work. The probability of becoming an entrepreneur as a function of wealth is increasing for low wealth levels ñ as predicted by standard static models - but it is decreasing for higher wealth levels. US data are used to study the qualitative and quantitative predictions of the dynamic model. Welfare cost of borrowing constraints are found to be signiÖcant, around 6% of lifetime consumption. The size of poverty traps is small. I thank Fernando Alvarez, Gary Becker, Pierre-AndrÈ Chiappori, Marty Eichenbaum, Xavier Gine, James Heckman, Boyan Jovanovic, Joe Kaboski, Alex Monge, …va Nagyp·l, Juan Pablo Nicolini, Robert Townsend and Iv·n Werning for valuable comments and sugges- tions. I also beneÖted from co