DP10260 Financing Constraints, Home Equity and Selection into Entrepreneurship

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 exploit a mortgage reform that differentially unlocked home equity across the Danish population and study how this impacted selection into entrepreneurship. We find that increased entry was concentrated among entrepreneurs whose firms were founded in industries where they had no prior work experience. In addition, we find that marginal entrants benefitting from the reform had higher pre-entry earnings and that a significant share of entrants started longer-lasting firms. Our results are most consistent with the view that housing collateral enabled high ability individuals with less-well-established track records to overcome credit rationing and start new firms, rather than just leading to `frivolous entry' by those without prior industry experience.