Essays on Entrepreneurship

It is often argued that borrowing constraints are crucial to the understanding of entrepreneurial activity in the United States. However, portfolio data and calibration exercises raise doubts about the importance of borrowing constraints. This thesis provides three chapters on the subject of entrepreneurship, two study the role of borrowing constraints and another shows that introducing uncertainty about ability in an occupational choice model without financial frictions can generate many patterns that resemble capital market imperfections. In the first chapter, I model agents who are imperfectly informed about their entrepreneurial ability and whose income provides a signal about their ability. In each period, they observe their income and choose their occupation (worker or entrepreneur) for the next period on the basis of their belief about their ability. I find that such a model produces patterns of wealth, savings, entry into entrepreneurship, and correlations between cash flow and investment that are consistent with the data. While previous work has used these patterns to argue that entrepreneurs face binding borrowing constraints, this paper shows that the same patterns may emerge simply because entrepreneurs are uncertain about their ability and learn slowly about it. In the second chapter, I use cross-sectional and panel data from the Survey of Consumer Finances across occupations and occupational transition groups. I argue that the evidence on mortgage rates and holdings of stocks and bonds of entrepreneurs are at odds with theories that propose borrowing constraints as the key ingredient in understanding occupational choice and entrepreneurial activity in the United States. Finally, the last chapter uses a standard general equilibrium model of occupational choice to study the role of financial constraints, finding that borrowing constraints are tighter in the model than in the data. Next, I recalibrate the model to match measures of firm size and slack in the financial constraint given by the real estate equity available for borrowing on the entrepreneur's primary home. Finally, two policy experiments are analyzed for both calibrations, highlighting the equilibrium effects of the differing degrees of tightness in the borrowing constraints. Main Advisor: George-Marios Angeletos Title: Professor of Economics Advisor: Ricardo Caballero Title: Ford International Professor of Economics, Macroeconomics, and International Finance