Housing Collateral, Credit Constraints and Entrepreneurship - Evidence from a Mortgage Reform
We study how a mortgage reform that exogenously increased access to credit had an impact on entrepreneurship, using individual-level micro data from Denmark. The reform allows us to disentangle the role of credit access from wealth effects that typically confound analyses of the collateral channel. We find that a $30,000 increase in credit availability led to a 12 basis point increase in entrepreneurship, equivalent to a 4% increase in the number of entrepreneurs. New entrants were more likely to start businesses in sectors where they had no prior experience, and were more likely to fail than those who did not benefit from the reform. Our results provide evidence that credit constraints do affect entrepreneurship, but that the overall magnitudes are small. Moreover, the marginal individuals selecting into entrepreneurship when constraints are relaxed may well be starting businesses that are of lower quality than the average existing businesses, leading to an increase in churning entry that does not translate into a sustained increase in the overall level of entrepreneurship.
We are extremely grateful to Manuel Adelino, Joan Farre-Mensa, Bill Kerr, Francine Lafontaine, Matt Notowidigdo, Alex Oettl, David Robinson, Matt Rhodes-Kropf, Martin Schmalz, Antoinette Schoar, David Sraer, Peter Thompson and the seminar participants at the NBER summer institute, NBER productivity lunch, ISNIE conference and Georgia Tech for helpful comments. The research presented in this paper is supported by funding from the Danish Council for Independent Research, the Danish Economic Policy Research Network - EPRN, the Kauffman Foundation's Junior Faculty Fellowship and the Division of Research and Faculty Development at the Harvard Business School. All errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.