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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