Entrepreneurship and Liquidity Constraints: Evidence from Sweden

Hurst and Lusardi (2004) use a specification with higher‐order polynomials to estimate the relationship between wealth and entrepreneurship. They find evidence against the existence of extensive liquidity constraints in the United States. In this paper, their approach is replicated on Swedish data. A positive relationship between wealth and entrepreneurship is found, which supports the liquidity constraints hypothesis. Alternative methods for handling the endogeneity problem and distinguishing between absolute decreasing risk aversion and liquidity constraints lend further support to the hypothesis. The analysis suggests that there exist liquidity constraints in Sweden, which are possibly more extensive than in the United States.     

Wealth effects on the housing markets: Do market liquidity and market states matter?

This paper analyzes the effect of household wealth (including housing and financial wealth) on housing sales and probes their long-run and short-run dynamic relationships. We further examine the short-run effect of financial wealth on housing sales by employing quantile regressions, restricted upon different liquidity (quantile) levels and up-down housing markets, from which the differences between the early and late stages of an uptrend/downtrend can be respectively exhibited. We find that housing wealth, income, and mortgage rates have long-run influences on housing sales. Looking at the short run, we find that housing sales only respond to housing wealth and mortgage rates. When we distinguish the effects of financial wealth on housing sales in up-down housing markets, we note a positive influence of financial wealth on housing sales in down markets, but not in up markets. Particularly, our results show an impact of housing liquidity on the short-run relationships.     

When expectations become aspirations: reference-dependent preferences and liquidity constraints

A large body of literature suggests that consumers derive utility from gains and losses relative to a reference point. This paper shows that such reference dependence can affect savings in opposite directions depending on whether people face liquidity constraints. Existing models for wealth and intertemporal choice predict that reference dependence reduces savings, but these models abstract from liquidity constraints. Introducing a liquidity constraint, I find that reference dependence can increase optimal savings for people without access to credit. Ex post, after reference points have been formed, liquidity constraints force consumers to take part of an income loss in early periods, inducing those who are reference dependent to concentrate the full loss in early periods and save in order to eliminate future losses. Further, anticipating a liquidity constraint raises the expected level of future consumption and thus the expectations-based reference point for future periods, creating an ex-ante savings motive. These findings underscore that it is important to account for financial market imperfections when applying or testing reference-dependent models in low-income settings, and potentially explain heterogeneity in how much the poor save when facing binding liquidity constraints.     

The rise of female entrepreneurs: New evidence on gender differences in liquidity constraints

In this paper, we study the importance of liquidity constraints for entrepreneurial activity, using previously unexplored data from the UK. Using inheritances as an instrument, IV estimates reveal that single women drive the overall relationship between personal wealth and the propensity to start a new business. Defining business ownership rather than self-employment as the entrepreneurial outcome measure is also shown to be critical. Using self-employment leads to selection bias and underestimates the impact of personal wealth. The results imply that efforts aimed at relieving the liquidity constraints of single women could help further accelerate the recent rise of female entrepreneurship.     

SELF-EMPLOYMENT AND WEALTH INEQUALITY

Is the decision to become and stay self-employed constrained by access to credit? If this is the case, a more unequal wealth distribution will—for empirically observed distributions–imply more self-employed, since the number of people able to provide collateral will be higher. Swedish data between 1920 and 1992 suggest that wealth inequality and the share of self-employed among those working are positively related. The data, therefore, are consistent with the hypothesis that liquidity constraints are binding on the decision to become and stay self-employed.     

Optimal savings with taxable and tax-deferred accounts

We solve and estimate a life-cycle model with earnings risk and liquidity constraints in the presence of tax-deferred retirement accounts (TDAs). We explicitly consider two very different types of households (with TDAs): direct and indirect stockholders. The latter hold stocks only through TDAs and, consistent with the data, save considerably less than the former, who hold stocks both inside and outside these accounts. We find that TDAs promote higher wealth accumulation but only marginally higher net savings. Consumption increases mostly during retirement, as desired, but the effect is largest for those households with higher savings rates already.     

Entrepreneurship in post‐conflict transition1

We examine new self‐employment entry and its viability in Bosnia and Herzegovina, using a rich household survey for the years 2001–2004. We find that wealthier households are more likely to engage in viable self‐employment and create employment suggesting an important role for financing constraints. Specifically, although having an existing bank relationship is not significantly related to the entry decision, it is positively related to the survival for new entrepreneurs and their employment creation. We also find a non‐linear relationship between remittances and entry in that individuals not receiving remittances are more likely to enter self‐employment; but, if they do receive them, the likelihood of starting a business increases in the fraction of wealth received from domestic remittances. Finally, people working in the informal sector are more likely to become viable entrepreneurs, particularly those provided with loans from micro‐credit organizations. These findings support the perception of the informal sector as an incubator for formal self‐employment in the early years of transition.     

Student loans and the allocation of graduate jobs

Higher education is not just a costly signal of native talent but also a means of raising a person's ability to hold a graduate job (and at least a certain educational achievement is required to get one). Graduate jobs differentiated by quality are allocated to graduates differentiated by native talent and parental wealth through a tournament. Non‐graduates jobs pay a fixed wage to those who do not participate in the tournament. Assuming that credit is rationed, some poor school leavers will go straight into the non‐graduate labour market even if they are talented enough to get a higher education and participate in the tournament. Some others will buy the same amount of higher education and end up doing graduate jobs of the same quality as less talented but richer school leavers. We show that student loans improve job matching and bring educational investments closer to efficiency. If the size of the loan is not very large, some poor school leavers will still be liquidity‐constrained and thus buy the same amount of higher education as less talented but richer ones. In that case, the former will get a productivity bonus. But raising the size of the loan to such a level that nobody is liquidity‐constrained could be socially optimal only if social preferences were extremely egalitarian.     

Do liquidity constraints generate excess sensitivity in consumption? New evidence from a sample of post-bankruptcy households

Previous work linking liquidity constraints to excessive consumption sensitivity have used household level information on wealth and assets to split the sample into households that are likely to be constrained from those with access to credit and liquidity. In this paper, we use the sample splitting methods of previous authors but refine the criteria by using direct information on whether the household filed for bankruptcy in the last 10 years. Legally, a flag can appear on a bankruptcy filer’s credit report for up to 10 years after bankruptcy. This bankruptcy flag affects an individual’s credit score, and therefore the individual’s access to credit, which may make post-bankruptcy consumers liquidity constrained. Our results indicate that post-bankruptcy consumers exhibit excess sensitivity likely due to the bankruptcy flag. Consistency checks confirm that the source of sensitivity is due to liquidity constraints and not other observationally equivalent behavior.     

Portfolio choice with internal habit formation: a life-cycle model with uninsurable labor income risk

Motivated by the success of internal habit formation preferences in explaining asset pricing puzzles, we introduce these preferences in a life-cycle model of consumption and portfolio choice with liquidity constraints, undiversifiable labor income risk and stock-market participation costs. In contrast to the initial motivation, we find that the model is not able to simultaneously match two very important stylized facts: a low stock market participation rate, and moderate equity holdings for those households that do invest in stocks. Habit formation increases wealth accumulation because the intertemporal consumption smoothing motive is stronger. As a result, households start participating in the stock market very early in life, and invest their portfolios almost fully in stocks. Therefore, we conclude that, with respect to its ability to match the empirical evidence on asset allocation behavior, the internal habit formation model is dominated by its time-separable utility counterpart.     

An Incomplete Markets Explanation of the Uncovered Interest Rate Parity Puzzle

A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a time‐varying risk premium. This paper presents a mechanism in a simple two‐country two‐good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a parameterization where international wealth effects are important, liquidity constraints on an internationally traded bond and agents’ strong resulting precautionary motives successfully generates a time‐varying risk premium: countries that have accumulated large outstanding external positions have, being closer to the constraints, stronger precautionary motives and their asset carries a risk premium.     

Social conflict and growth

Despite the predictions of the neoclassical theory of economic growth, we observe that poor countries have invested at lower rates and have not grown faster than rich countries. To explain these empirical regularities we provide a game-theoretic model of conflict between social groups over the distribution of income. Among all possible equilibria, we concentrate on those that are on the constrained Pareto frontier. We study how the level of wealth and the degree of inequality affects growth. We show how lower wealth can lead to lower growth and even to stagnation when the incentives to domestic accumulation are weakened by redistributive considerations.     

MEASURING POVERTY USING BOTH INCOME AND WEALTH: A CROSS‐COUNTRY COMPARISON BETWEEN THE U.S. AND SPAIN

We study the correspondence between a household's income and its vulnerability to income shocks in two developed countries: the U.S. and Spain. Vulnerability is measured by the availability of wealth to smooth consumption in a multidimensional approach to poverty, which allows us to identify three groups of households: the twice‐poor group, which includes income‐poor households who lack an adequate stock of wealth; the group of protected‐poor households, which are all those income‐poor families with a buffer stock of wealth they can rely on; and the vulnerable‐non‐poor group, including households above the income‐poverty line that do not hold any stock of wealth. Interestingly, the risk of belonging to these groups changes over the life‐cycle in both countries while the size of the groups differs significantly between Spain and the U.S., although this result is quite sensitive to whether the housing wealth component is included in the wealth measure or not.     

Altruism,Liquidity Constraint,and Investment in Education

In Japan and other East Asian societies, household educational expenditures per child (especially private tutoring expenditures) have increased sharply, perhaps to an excessive degree. This paper suggests a rationale for many families to invest extensively in education, whereas other relevant literature rarely addresses the possibility of excessive educational investment. Introducing altruism and liquidity constraints into a model in which parent and child interact for determining investment in the child's education, we show that educational investment may be excessive unless the family is profoundly liquidity‐constrained. Our result extends previous findings incorporating the Samaritan's Dilemma. We also discuss public policy designed to remedy the inefficiency in educational investment.     

Portfolio Choice and Liquidity Constraints*

We study the infinite‐horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle. We show why the puzzle is robust to several model variations, and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution. We find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because, for a plausible range of parameter values, households can achieve desired consumption smoothing with small or zero holdings of stocks. Such costs could arise from informational considerations, sign‐up fees, and investor inertia.     

Envy and Inequality*

We present an overlapping generations economy, populated by heterogeneous agents who care about both consumption relative to others and the bequest they leave to their offspring. We show that saving and bequest rates vary across the income distribution, and we obtain several interesting results. First, envy reduces the steady‐state capital stock and increases the degree of inequality in consumption, capital ownership, and bequests. Second, if the bequest motive is sufficiently strong the equalizing effect of bequests disappears. Third, income inequality for a given cohort increases with age. Fourth, the distribution of inherited wealth becomes more unequal than that of wealth in general. Fifth, economic position becomes more persistent across generations.     

流动性约束与货币政策的资产价格效应

本文在新凯恩斯主义分析框架下,基于一个动态随机模型探讨了代理人消费流动性约束下的货币政策的资产价格效应,得到下列结论：资产价格波动通过财富效应影响代理人的消费。以利率为操作目标的最优货币政策应对股价、房价等资产价格波动做出反应,而其反应强度依赖于受流动性约束的代理人所占的比重。由于资产价格波动导致了流动性约束的时变性,最优利率规则对股价、房价等资产价格波动的最优权重也具有时变性。本文的实证分析表明,我国央行对房价和股价波动的利率调整具有时变性,以及此次金融危机爆发期间显现的这种时变性特征,与本文理论分析结果相吻合。     

GOVERNMENT SPENDING,ENTRY, AND THE CONSUMPTION CROWDING‐IN PUZZLE

This article documents empirically that net firm entry robustly rises after a U.S. government spending expansion. We use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding‐in after positive expenditure shocks. Endogenous‐entry models typically fail to generate the observed joint increase in consumption and entry. Model features that dampen the wealth effect, such as rule‐of‐thumb households or complementarity between labor and consumption in preferences, tend to reduce entry. We show that utility‐ or productivity‐enhancing public spending can reconcile the model with our documented fact and performs well empirically.     

Moral Hazards,Bankruptcy Costs,and International Financial Capital Mobility*

Using a model with moral hazard and bankruptcy costs, we show that the direction of intertemporal trade between countries depends on differences in their autarkic distributions of wealth. We also examine the consequences of redistribution policies and bail‐out policies in this framework. We show that, in the presence of bankruptcy cost and capital market imperfections due to moral hazard, the very rich and the very poor do not undertake any risk and choose to be passive lenders. Only individuals whose wealth lies within an intermediate range choose to become entrepreneurs. Redistributive policies influence the supply of entrepreneurship and autarkic interest rates.     

Precautionary Saving,Financial Risk,and Portfolio Choice

Relying on a direct question about the desired amount of precautionary wealth from the 2002 wave of the Italian “Survey of Household Income and Wealth,” I assess the main determinants of the precautionary motive for saving, focusing on the role played by financial risk on households' saving decisions. Households that invest mainly in safe assets do not need to protect themselves against future and unexpected financial losses. Consequently, once we control for households' sources of risk beside financial ones, the amount of precautionary savings of a household investing exclusively in safe assets should be lower compared to households who detain a non‐negligible share of risky assets in their portfolio. Results show that, as expected, a strong and negative correlation exists between the desired amount of precautionary wealth and the ownership of a portfolio made exclusively of safe assets.