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Entrepreneurship, Frictions and Wealth

Working Paper 620 | Published August 1, 2003

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Entrepreneurship, Frictions and Wealth

Abstract

Although the role of financial constraints on entrepreneurial choices has received considerable attention, the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth concentration and, conversely, the distribution of wealth affects entrepreneurial choices in presence of borrowing constraints. We construct a model that matches wealth inequality very well, both for entrepreneurs and non-entrepreneurs, and find that more restrictive borrowing constraints generate less wealth concentration, but also reduce average firm size, aggregate capital and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only, there would be fewer large firms, fewer entrepreneurs, and less aggregate capital, but also less wealth concentration.


Published in _Journal of Political Economy_ (Vol. 114, No. 5, October 2006, 835-870), https://doi.org/10.1086/508032.