1 SCHOOLING, CAPITAL CONSTRAINTS AND ENTREPRENEURIAL PERFORMANCE:

To what extent is the performance of a small business venture, once started, a¤ected by capital constraints at the time of inception and by the business founders investment in human capital? We attempt to answer this question taking into account the potential endogeneity of human and \u85nancial capital, and also possible interdependence between these variables. A theoretical model is developed which generates predictions about the nature and directions of the interdependencies. Using a rich data set on Dutch entrepreneurs in 1995, we obtain \u85nd-ings that are broadly consistent with the theoretical model. Instrumental variable estimates indicate that a 1 percentage point relaxation of capital constraints increases entrepreneurs gross business incomes by 3.9 per cent on average. Also, education enhances entrepreneurs performance both directly with a rate of return of 13.7 per cent and indirectly, because each extra year of schooling decreases capital constraints by 1.18 percentage points. The in-direct e¤ect of education on entrepreneursperformance is estimated to be between 3.0 and 4.6 per cent. 2