DP10260 Housing Collateral, Credit Constraints and Entrepreneurship - Evidence from a Mortgage Reform

Author(s): Thais Laerkholm Jensen, Søren Leth-Petersen, Ramana Nanda
Publication Date: November 2014
Keyword(s): credit constraints, entrepreneurship, household wealth, mortgage finance
JEL(s): D14, D31, G21, L25, L26
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10260

We study how a mortgage reform that exogenously increased access to credit had an impact on entrepreneurship, using individual-level micro data from Denmark. The reform allows us to disentangle the role of credit access from wealth effects that typically confound analyses of the collateral channel. We find that a $30,000 increase in credit availability led to a 12 basis point increase in entrepreneurship, equivalent to a 4% increase in the number of entrepreneurs. New entrants were more likely to start businesses in sectors where they had no prior experience, and were more likely to fail than those who did not benefit from the reform. Our results provide evidence that credit constraints do affect entrepreneurship, but that the overall magnitudes are small. Moreover, the marginal individuals selecting into entrepreneurship when constraints are relaxed may well be starting businesses that are of lower quality than the average existing businesses, leading to an increase in churning entry that does not translate into a sustained increase in the overall level of entrepreneurship.