European Central Bank

This paper shows that housing wealth helps alleviate credit constraints for potential entrepreneurs by enabling home owners to extract equity from their property and invest it in their business. Using a large U.S. individual-level survey dataset for the 1996–2006 period, we find that a 10 % increase in home equity raises the share of individuals who transition into self-employment each year from 1 % to 1.07%. Our results persist when we use proxies for aggregate housing demand shocks and for the topological elasticity of housing supply to generate variation in home equity that is orthogonal to entrepreneurial choice. (JEL G21, L26) In this paper, we identify the effect of housing wealth on new business creation by exploiting the exogenous variation in home equity induced by the U.S. housing boom of the late 1990s and early to mid-2000s. Using a uniquely suited individual-level dataset of U.S. home owners and renters, we investigate how changes in home equity affect the probability of becoming an entrepreneur. This allows us to study whether nascent entrepreneurs are deterred by credit constraints and whether the ability to extract housing wealth by increasing their mortgage helps them to overcome these constraints. A number of influential papers have suggested that potential entrepreneurs can be discouraged from starting a business if borrowing constraints prevent them from raising sufficient capital.1 Black and Strahan (2002), Cetorelli an