A Dynamic Model of Entrepreneurship with Borrowing Constraints

In this paper I show that the standard model of entrepreneurship with borrowing constraints (e.g. Evans and Jovanovic (1989)) embedded in an optimal savings problem predicts that the transition to entrepreneurship as a function of current wealth is ...rst increasing and eventually decreasing. This has important implications for the interpretation of reduced form estimates of the e¤ect of wealth on the probability that an agent starts a business. In particular, it implies that for rich agents the reduced form estimates of this probability underestimate the e¤ect of a exogenous wealth transfer.