Mortgage debt and entrepreneurship

Publication type

Journal Article

Authors

Publication date

January 15, 2018

Summary:

We study the link between mortgage debt and entrepreneurship using a model of occupational choice and housing tenure in a setting where loans are recourse—like in the UK and several US states. Our model shows that as long as the mortgage interest rate exceeds the risk-free rate: (i) mortgage debt diminishes the likelihood of entrepreneurship by amplifying risk aversion; and (ii) the negative relation between mortgage debt and entrepreneurship increases with income volatility. Our model also shows that the link between housing equity and entrepreneurship is ambiguously signed because of competing portfolio and wealth effects. We use the British Household Panel Survey to test and confirm the model predictions, and deal with unobservable heterogeneity employing three research designs—individual fixed effects, housing-spell fixed effects, and instrumental variables. A one standard deviation increase in leverage reduces the probability of entrepreneurship by 10–20 percent.

Published in

Journal of Urban Economics

Volume and page numbers

Volume: 103 , p.52 -66

DOI

http://dx.doi.org/10.1016/j.jue.2017.10.003

ISSN

941190

Subjects

Notes

Open Access

Open Access funded by Economic and Social Research Council

Under a Creative Commons license


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