Entrepreneurship and Risk Aversion

Abstract

Evans and Jovanovic (1989, Journal of Political Economy 97(4), 808–827) find that wealth is an important determinant of business startups due to liquidity constraints. However, Cressy (2000, Economic Letters 66, 235–240) argues that if risk aversion is a negative function of wealth, Evans and Jovanovic’s empirical results could be spurious and the positive effect of wealth could be due to the omission of risk aversion in the regression equation. In other words, according to Cressy, one’s wealth does not have any effect on business startups once the degree of risk aversion is accounted for. This paper attempts to investigate the validity of Cressy’s conjecture. We empirically examine the effect of wealth on the transition into self-employment, while allowing for the effect of risk aversion. Our empirical findings show that Evans and Jovanovic’s (1989) results are robust, i.e., wealth has a positive effect on business startups even allowing for the confounding effects of risk aversion.

This is a preview of subscription content, log in to check access.

References

  1. R. B. Barsky F. T. Juster M. S. Kimball M. D. Shapiro (1997) ArticleTitlePreference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study Quarterly Journal of Economics 112 IssueID2 537–579 Occurrence Handle10.1162/003355397555280

    Article  Google Scholar 

  2. G Bassett SuffixJr. R. W. Koenker (1978) ArticleTitleAsymptotic Theory of Least Absolute Error Regression Journal of the American Statistical Association 73 IssueID363 618–22 Occurrence Handle10.2307/2286611

    Article  Google Scholar 

  3. D. G. Blanchflower B. D. Meyer (1994) ArticleTitleA Longitudinal Analysis of the Young Self Employed in Australia and the United States Small Business Economics 6 1–19 Occurrence Handle10.1007/BF01066108

    Article  Google Scholar 

  4. D. G. Blanchflower A. J. Oswald (1999) ArticleTitleWhat Makes an Entrepreneur? Journal of Labor Economics 16 IssueID1 26–60 Occurrence Handle10.1086/209881

    Article  Google Scholar 

  5. Cantillon, R., 1755, Essai sur la nature du commerce en general, T. Tsuda (ed.). Tokyo: Kinokuya.

  6. R. Cressy (1996) ArticleTitleAre Business Startups Debt-Rationed? Economic Journal 106 1253–1270 Occurrence Handle10.2307/2235519

    Article  Google Scholar 

  7. R. Cressy (2000) ArticleTitleCredit Rationing or Entrepreneurial Aversion? An Alternative Explanation for the Evans and Jovanovic Finding Economics Letters 66 235–240 Occurrence Handle10.1016/S0165-1765(99)00216-5

    Article  Google Scholar 

  8. T. Dunn D. Holtz-Eakin (2000) ArticleTitleFinancial Capital, Human Capital, and the Transition to Self-Employment: Evidence from Intergenerational Links Journal of Labor Economics 18 IssueID2 282–305 Occurrence Handle10.1086/209959

    Article  Google Scholar 

  9. B. Efron R. Tibshirani (1993) An Introduction to the Bootstrap Chapman and Hall New York

    Google Scholar 

  10. D. S. Evans B. Jovanovic (1989) ArticleTitleAn Estimated Model of Entrepreneurial Choice under Liquidity Constraints Journal of Political Economy 97 IssueID4 808–827 Occurrence Handle10.1086/261629

    Article  Google Scholar 

  11. D. S. Evans L. S. Leighton’s (1989) ArticleTitleSome Empirical Aspects of Entrepreneurship American Economic Review 79 IssueID3 519–535

    Google Scholar 

  12. R. W. Fairlie (1999) ArticleTitleThe Absence of the African American Owned Business: An Analysis of the Dynamics of Self-Employment Journal of Labor Economics 17 IssueID1 80–108 Occurrence Handle10.1086/209914

    Article  Google Scholar 

  13. Guiso, L. and M. Paiella, 2001, ‘Risk Aversion, Wealth and Background Risk’ CERPR Discussion Paper 2728, Centre for Economic Policy Research, London.

  14. D. Holtz-Eakin D. Joulfaian H. Rosen (1994) ArticleTitleEntrepreneurial Decisions and Liquidity Constraints RAND Journal of Economics 25 IssueID2 334–347 Occurrence Handle10.2307/2555834

    Article  Google Scholar 

  15. S. M. Kanbur (1979) ArticleTitleOf Risk Taking and the Personal Distribution of Income Journal of Political Economy 87 760–797

    Google Scholar 

  16. R. R. Kihlstrom J. J. Laffont (1979) ArticleTitleA General Equilibrium Entrepreneurial Theory of New Firm Formation Based on Risk Aversion Journal of Political Economy 87 304–316

    Google Scholar 

  17. F. Knight (1921) Risk, Uncertainty, and Profit University of Chicago Press Chicago

    Google Scholar 

  18. T. Lindh H. Ohlsson (1996) ArticleTitle‘Self-Employment and Windfall Gains: Evidence From the Swedish Lottery’ Economic Journal 106 IssueIDNovember 1515–1526 Occurrence Handle10.2307/2235198

    Article  Google Scholar 

  19. A. Marshall (1890) Principles of Economics Macmillan London

    Google Scholar 

  20. J. Schumpeter (1911) The Theory of Economic Development Mass.: Har-vard University Press Cambridge

    Google Scholar 

  21. C. M. Praag ParticleVan J. S. Cramer (2001) ArticleTitleThe Roots of Entrepreneurship and Labour Demand: Individual Ability and Low Aversion Economica 68 IssueID269 45–62 Occurrence Handle10.1111/1468-0335.00232

    Article  Google Scholar 

  22. M. Praag Particlevan J. S. Cramer J. Hartog N. Jonker (2002) ArticleTitleLow Risk Aversion Encourages the Choice for Entrepreneurship: An Empirical Test of a Truism Journal of Economic Behavior and Organization 48 IssueID1 29–49 Occurrence Handle10.1016/S0167-2681(01)00222-0

    Article  Google Scholar 

Download references

Author information

Affiliations

Authors

Corresponding author

Correspondence to Wei-Der Tsai.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Kan, K., Tsai, W. Entrepreneurship and Risk Aversion. Small Bus Econ 26, 465–474 (2006). https://doi.org/10.1007/s11187-005-5603-7

Download citation

Keywords

  • business startup
  • liquidity constraints
  • self-employment