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Research Paper Bank of England Working Paper Series 560

Mortgage debt and entrepreneurship

Authors

Publication date

Oct 2015

Summary

We study the link between mortgage debt and entrepreneurship using a model of occupational choice and housing tenure in a setting where homeowners do not default on their debt. Our model predicts that, as long as the mortgage interest rate exceeds the rate of interest on liquid wealth: (i) mortgage debt, by amplifying risk aversion, diminishes the likelihood of entrepreneurship; and (ii) the negative relation between leverage and entrepreneurship increases with income volatility. Our model also shows that the link between housing wealth and entrepreneurship is ambiguously signed because of competing portfolio and hedging effects. Using the British Household Panel Survey, we test and confirm the model’s predictions. A one standard deviation increase in leverage reduces the probability of entrepreneurship by 10%–12%.

Subjects

Management: Business, Household Economics, and Housing Market

Links

https://www.bankofengland.co.uk/working-paper/2015/mortgage-debt-and-entrepreneurship


Related publications

  1. Mortgage debt and entrepreneurship

    Philippe Bracke, Christian A.L. Hilber, and Olmo Silva

    1. Management: Business
    2. Household Economics
    3. Housing Market

#524787


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