STICKING IT OUT - ENTREPRENEURIAL SURVIVAL AND LIQUIDITY CONSTRAINTS

We examine why some individuals survive as entrepreneurs and others do not. In addition, we analyze the growth of entrepreneurial enterprise s, conditional on surviving. Our focus is on the role of access to cap ital: To what extent do liquidity constraints increase the likelihood of entrepreneurial failure? The empirical strategy is based on the fol lowing logic: If entrepreneurs cannot borrow to attain their profit-ma ximizing levels of capital, then those entrepreneurs who have substant ial personal financial resources will be more successful than those wh o do not. The data consist of the 1981 and 1985 federal individual inc ome tax returns of a group of people who received inheritances. These data allow us to identify those individuals who were sole proprietors in 1981 and to determine the extent to which the decision to remain a sole proprietor was influenced by the magnitude of the inheritance-ind uced increase in liquidity. The results are consistent with the notion that liquidity constraints exert a noticeable influence on the viabil ity of entrepreneurial enterprises. For example, a $150,000 inheritanc e increases the probability that an individual will continue as a sole proprietor by 1.3 percentage points, and if the enterprise survives, its receipts increase by almost 20 percent.