CREAT: Census Research Exploration and Analysis Tool

The Winner's Curse of Human Capital

February 1999

Working Paper Number:

CES-99-05

Abstract

We extend a model developed by Evans) to explain when start-ups are credit constrained. We show that the magnitude of the credit constraint is conditioned by the relative productivity of human capital in both wage work and self employment. Empirical analysis reveals that entrepreneurs with greater levels of human capital and entrepreneurial abilities have both greater financial wealth and greater levels of start-up capital pointing to the endogenous nature of credit constraints. Start-ups are generally financially constrained when measured by the impact on start-up capital of predicted household income. Greater levels of human capital relaxes financial constraints, apparently due to greater productivity of human capital in wage work than in self-employment. Paradoxically, then, those who are the least likely to be credit constrained in self-employment are those that are least likely to switch into self-employment, and vice versa.

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:
investment, earnings, entrepreneurial, financial, venture, entrepreneur, entrepreneurship, finance, labor, endogenous, capital, lender, debt, wealth, borrow, credit, saving

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:
Characteristics of Business Owners, Center for Economic Studies, County Business Patterns, Chicago Census Research Data Center

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