Entrepreneurship, Windfall Gains and Financial Constraints: The Case of Germany

Abstract

In this paper we investigate the link between entrepreneurship and financial constraints. We develop a dynamic partial equilibrium model of an individual utility maximization that predicts that the person is more likely to start her business when financial constraints are eased. We test this hypothesis using German Socio-Economic Panel data covering the periods 2000 - 2002 and measure release from financial constraints by windfall gains. The estimates confirm that the individual has higher propensity to start her business when she gets windfall gains. Furthermore, there are stronger effects for persons that have sufficient, but not very high levels of income and abilities.