Publication type
Research Paper
Series Number
560
Series
Bank of England Working Paper Series
Authors
Publication date
October 15, 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
Link
https://www.bankofengland.co.uk/working-paper/2015/mortgage-debt-and-entrepreneurship
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