Liquidity Constraints, Household Wealth, and Self-Employment: The Case of Older Workers

This paper investigates the relationship between wealth and entrepreneurship of middleand older-age individuals in the United States, a group whose wealth holdings and rates of selfemployment are substantially higher than those of younger individuals. Using longitudinal data from the Health and Retirement Study that span over 14 years, we find entry into selfemployment increases with total wealth across the entire wealth distribution. The positive relationship persists with adjustments for health status, risk aversion and for permanent earnings – a proxy for unobserved ability. The positive association holds for liquid assets and is stronger for entry into businesses requiring substantial capital investment than those requiring low initial capital. We also find workers with access to wealth through a lump-sum distribution option of an employer-provided pension plan are 26 percent more likely to become self-employed than workers without this option.