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Journal ArticleDOI

An Estimated Model of Entrepreneurial Choice under Liquidity Constraints

01 Aug 1989-Journal of Political Economy (The University of Chicago Press)-Vol. 97, Iss: 4, pp 808-827
TL;DR: The authors show that the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal, and a would-be entrepreneur must bear most of the risk inherent in his venture.
Abstract: Is the capital function distinct from the entrepreneurial function in modern economies? Or does a person have to be wealthy before he or she can start a business? Knight and Schumpeter held different views on the answer to this question. Our empirical findings side with Knight: Liquidity constraints bind, and a would-be entrepreneur must bear most of the risk inherent in his venture. The reasoning is roughly this: The data show that wealthier people are more inclined to become entrepreneurs. In principle, this could be so because the wealthy tend to make better entrepreneurs, but the data reject this explanation. Instead, the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal.
Citations
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Journal ArticleDOI
TL;DR: In this article, the authors argue that opportunity discovery is a function of the distribution of information in society, and they show that entrepreneurs discover opportunities related to the information that they already possess.
Abstract: Before technological change leads to new processes, products, markets, or ways of organizing, entrepreneurs must discover opportunities in which to exploit the new technology. To date, research has not explained adequately why entrepreneurs discover these opportunities, which creates several conceptual problems in the entrepreneurship literature. Drawing on Austrian economics, I argue that opportunity discovery is a function of the distribution of information in society (Hayek 1945). Through in-depth case studies of eight sets of entrepreneurs who exploit a single MIT invention, I show that entrepreneurs discover opportunities related to the information that they already possess. I use these findings to draw several implications that differ from those prevailing in the entrepreneurship literature, including: (1) entrepreneurs do not always select between alternative market opportunities for new technologies; (2) the source of entrepreneurship lies in differences in information about opportunities; (3) the results of prior studies of entrepreneurial exploitation may suffer from bias; and (4) individual differences influence the opportunities that people discover, how their entrepreneurial efforts are organized, and how the government can influence this process.

4,281 citations


Cites background from "An Estimated Model of Entrepreneuri..."

  • ...Previous research has drawn conclusions about the effect of individual differences on the decision to exploit entrepreneurial opportunity based on the assumption of a zero correlation between individual differences and opportunity discovery (Khilstrom and Laffont 1979, Evans and Jovanovic 1989 )....

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  • ...Researchers typically adopt this approach because they draw on neoclassical economic or psychological theories that assume people will discover the same opportunities in a given technological change (Khilstrom and Laffont 1979), or discover opportunities that are uncorrelated with the attributes of the discoverers ( Evans and Jovanovic 1989 )....

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  • ...Much of the existing empirical evidence on opportunity exploitation has assumed that the attributes of people who discover opportunities are uncorrelated with the attributes of the opportunities that they discover ( Evans and Jovanovic 1989 )....

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  • ...Because any given entrepreneur can discover the complete set of opportunities that occur in response to a given technological change, neoclassical economics argues that entrepreneurs select between different opportunities through a process of maximization (Khilstrom and Laffont 1979, Evans and Jovanovic 1989 )....

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Journal ArticleDOI
TL;DR: This article analyzed the response of small versus large manufacturing firms to monetary policy and found that small firms account for a significantly disproportionate share of the manufacturing decline that follows tightening of monetary policy, while large firms initially borrow to accumulate inventories and after a brief period, small firms quickly shed inventories.
Abstract: We analyze the response of small versus large manufacturing firms to monetary policy. The goal is to obtain evidence on the importance of financial propagation mechanisms for aggregate activity. We find that small firms account for a significantly disproportionate share of the manufacturing decline that follows tightening of monetary policy. They play a surprisingly prominent role in the slowdown of inventory demand. Large firms initially borrow to accumulate inventories. After a brief period, small firms quickly shed inventories. We attempt to sort financial from nonfinancial explanations with evidence on asymmetries and on balance sheet effects on inventory demand across size classes.

2,426 citations

Journal ArticleDOI
TL;DR: In this paper, the authors used various micro data sets to study entrepreneurship and found that the probability of self-employment depends positively upon whether the individual ever received an inheritance or gift, and that the self-employed report higher levels of job and life satisfaction than employees.
Abstract: This article uses various micro data sets to study entrepreneurship. Consistent with the existence of capital constraints on potential entrepreneurs, the estimates imply that the probability of self‐employment depends positively upon whether the individual ever received an inheritance or gift. When directly questioned in interview surveys, potential entrepreneurs say that raising capital is their principal problem. Consistent with our theoretical model's predictions, the self‐employed report higher levels of job and life satisfaction than employees. Childhood psychological test scores, however, are not strongly correlated with later self‐employment.

2,218 citations


Cites background or methods or result from "An Estimated Model of Entrepreneuri..."

  • ...Among those who received a sum, the mean size of payment received by workers was £3,617 in 1981 (with a standard deviation of £8,421) and £5,655 in 1991 (with a standard deviation of £18,700) ....

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  • ...In recent work using U.S. micro data, Evans and Leighton (1989) and Evans and Jovanovic (1989) have argued formally that entrepreneurs face liquidity constraints....

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  • ...This seems a big effect even when contrasted with the Evans-Jovanovic estimate that removing all liquidity constraints would increase the flow of entrepreneurs from 3.8% to 5.1% (Evans and Jovanovic 1989, p. 824) ....

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  • ...Microeconometric work includes Fuchs (1982) and Rees and Shah (1986) and, more recently, Pickles and O’Farrell (1987) , Borjas and Bronars (1989) , Evans and Jovanovic (1989) , and Evans and Leighton (1989) .1 This article follows in the general spirit of 1 OECD (1986) and Blau (1987) are aggregate…...

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Book ChapterDOI
TL;DR: In this article, the authors examined the process of selection into self-employment over the life cycle and the determinants of self employment earnings using data from the National Longitudinal Survey of Young Men (NLS) for 1966-1981 and the Current Population Surveys for 1968-1987.
Abstract: About 4.2 million men and women operate businesses on a full-time basis. Comprising more than a tenth of all workers, they run most of our nation’s firms and employ about a tenth of all wage workers. The fraction of the labor force that is self-employed has increased since the mid-1970s after a long period of decline.1 This paper examines the process of selection into self-employment over the life cycle and the determinants of self-employment earnings using data from the National Longitudinal Survey of Young Men (NLS) for 1966–1981 and the Current Population Surveys for 1968–1987.

2,188 citations

References
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Book
01 Jan 1934
TL;DR: Buku ini memberikan infmasi tentang aliran melingkar kehidupan ekonomi sebagaimana dikondisikan oleh keadaan tertentu, fenomena fundamental dari pembangunan EKonomi, kredit, laba wirausaha, bunga atas modal, and siklus bisnis as mentioned in this paper.
Abstract: Buku ini memberikan infmasi tentang aliran melingkar kehidupan ekonomi sebagaimana dikondisikan oleh keadaan tertentu, fenomena fundamental dari pembangunan ekonomi, kredit dan modal, laba wirausaha, bunga atas modal, dan siklus bisnis.

16,325 citations

Posted ContentDOI
TL;DR: In this paper, a model is developed to provide the first theoretical justification for true credit rationing in a loan market, where the amount of the loan and amount of collateral demanded affect the behavior and distribution of borrowers, and interest rates serve as screening devices for evaluating risk.
Abstract: According to basic economics, if demand exceeds supply, prices will rise, thus decreasing demand or increasing supply until demand and supply are in equilibrium; thus if prices do their job, rationing will not exist. However, credit rationing does exist. This paper demonstrates that even in equilibrium, credit rationing will exist in a loan market. Credit rationing is defined as occurring either (a) among loan applicants who appear identical, and some do and do not receive loans, even though the rejected applicants would pay higher interest rates; or (b) there are groups who, with a given credit supply, cannot obtain loans at any rate, even though with larger credit supply they would. A model is developed to provide the first theoretical justification for true credit rationing. The amount of the loan and the amount of collateral demanded affect the behavior and distribution of borrowers. Consequently, faced with increased credit demand, it may not be profitable to raise interest rates or collateral; instead banks deny loans to borrowers who are observationally indistinguishable from those receiving loans. It is not argued that credit rationing always occurs, but that it occurs under plausible assumptions about lender and borrower behavior. In the model, interest rates serve as screening devices for evaluating risk. Interest rates change the behavior (serve as incentive mechanism) for the borrower, increasing the relative attractiveness of riskier projects; banks ration credit, rather than increase rates when there is excess demand. Banks are shown not to increase collateral as a means of allocating credit; although collateral may have incentivizing effects, it may have adverse selection effects. Equity, nonlinear payment schedules, and contingency contracts may be introduced and yet there still may be rationing. The law of supply and demand is thus a result generated by specific assumptions and is model specific; credit rationing does exist. (TNM)

13,126 citations

Book
01 Jan 1921
TL;DR: In Risk, Uncertainty and Profit, Frank Knight explored the riddle of profitability in a competitive market profit should not be possible under competitive conditions, as the entry of new entrepreneurs would drive prices down and nullify margins, however evidence abounds of competitive yet profitable markets as mentioned in this paper.
Abstract: In Risk, Uncertainty and Profit, Frank Knight explored the riddle of profitability in a competitive market profit should not be possible under competitive conditions, as the entry of new entrepreneurs would drive prices down and nullify margins, however evidence abounds of competitive yet profitable markets. To explain this seeming paradox, Knight uncovers the distinction between calculable risk and essentially unknowable uncertainty. Knight argued that risk stems from repeated events, which therefore allow probabilities to be calculated and factored into decisions, as for instance insurers do. Uncertainty however, stems from events that are unpredictable and as such cannot be prepared against. According to Knight, it is the interplay between risk and uncertainty on the one hand and competition between incumbent and new entrepreneurs that accounts for the enormous variation in profitability across firms and, for the same firms, over time. His insights on the sources of profit have been instrumental in shaping modern economic theory and to the development of a useful understanding of probability. This New Edition has been typeset with modern techniques and contains a newly compiled Index of important topics. It has been painstakingly proofread to ensure that it is free from errors and that the content is faithful to the original.

10,309 citations

Posted Content
TL;DR: Kirzner as discussed by the authors argues that the assumption of perfect knowledge is unrealistic and argues that every market participant is a potential entrepreneur who can exploit a situation, which depends on a lack of perfect information among the market participants.
Abstract: Kirzner, writing from a neo-Austrian economic perspective that is inherently dynamic with an emphasis on action over time, offers a critique of the prevailing positivistic, value freedom of orthodox microeconomics and price theory, focusing on what he believes is its unrealistic emphasis on static equilibrium analysis. Kirzner criticizes the methodology of Robbinsian equililbrium analysis in which a competitive market is a situation in which buyers and sellers have perfect knowledge and in which decision-making is mechanical and its solutions given. This analysis, according to Kirzner, eliminates all consideration of the competitive process and of entrepreneurship (which is synonymous, for him, with competitive activity); the assumption of perfect knowledge is unrealistic. He offers a full elaboration of the Mises-Hayek view of entrepreneurship and competition as a process based on von Mises' idea of "human action" rather than Marshall's idea of economizing. Kirzner sees the entrepreneur as always alert to information and propelling the system forward by seeking out price discrepancies as opportunities for profit. This process depends not on impulses from technology or genius; rather every market participant is a potential entrepreneur who can exploit a situation, which depends on a lack of perfect knowledge among the market participants. Entrepreneurial activity is always competitive; and competitive activity is always entrepreneurial. Kirzner is thus also a critique of the Schumpeterian view of entrepreneurship as disrupter of equilibrium; rather the entrepreneur removes disequilibrium in a short-run movement to an equilibrium position. A Kirznerian entrepreneur is a decision-maker whose entire role arises from alertness to unnoticed opportunities or knowledge about market data. Within the context of entrepreneurial activity, he offers a neo-Austrian redefinition of the concept of monopoly and competition. Since for Kirzner entrepreneurship involves no element of resource ownership, monopoly is defined as the impact of input ownership on the competitive process, and not the shape of the demand curve facing a firm. A monopoly position can be won by an alert entrepreneur. In the light of his theory of competition, Kirzner provides a new theoretical place for advertising and selling costs. Advertising, which promotes and calls attention to product differentiation, is the "weapon" of competition, which allows competitive-entrepreneurial adjustments in the type of products placed in the market in disequilibrium. Kirzner's revaluation of advertising is thus opposed to the idea of advertising as a social waste. Kirzner also offers a new conception of economic welfare based on the "coordination-of-knowledge-and-actions" instead of the orthodox "allocation of social resources" standard. (TNM)

5,214 citations