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The role of household wealth in funding self-employment in European countries
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Date
2023
Authors
Liu, Yibin
Journal Title
Journal ISSN
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Publisher
University College Cork
Published Version
Abstract
This thesis explores the role of household wealth in funding self-employment across euro-zone countries. The thesis considers key types of household wealth (i.e., assets, liabilities, income, and inheritances) and their components. It uses a highly detailed cross-country micro dataset constructed from three waves of the European Central Bank’s Household Finance and Consumption Survey (HFCS), over the period 2010-2017. Household wealth is perceived as a vital financial resource in assisting would-be and actual self-employed individuals to alleviate financial constraints, which can significantly hinder the decision to be self-employed and impair the performance of self-employed business (Quadrini, 2009; Cole and Sokolyk, 2018; Levine and Rubinstein, 2020). The financial constraints experienced by those in self-employment are mainly triggered by asymmetric information in the capital market, and usually result in restrictive access to finance (Moscalu et al., 2020), limited credit financing and borrowing (Banerjee et al., 2017), and a lack of financial liquidity (Gentry and Hubbard, 2004). Within this context, different types of household wealth have been found to support those in self-employment to enable them to obtain finance (Bhaird and Lucey, 2010; Jensen et al., 2022; Åstebro and Bernhardt, 2003; Demirgüc et al., 2007; Lin et al., 2000). Essentially, household wealth is potentially able to enhance creditworthiness and add financial liquidity to self-employment and self-employed businesses. Existing literature focuses on one or two type(s) of household wealth, resulting in comparatively ambiguous findings about the influence of household wealth on funding self-employment. This thesis addresses this gap by extensively examining aggregate measurement of each key type of household wealth and detailed measurements of their components. Doing so allows this thesis to address three overreaching objectives: (1) to identify the difference in household wealth between self-employment and paid employment; (2) to investigate the impact of household wealth on the decision to be self-employed; and (3) to examine whether household wealth affects the performance of self-employed businesses.
The first empirical Chapter of this thesis provides a comparison of household wealth between self-employed individuals and paid employees. A propensity score matching methodology is employed, which includes household assets, liabilities, other income (excluding self-employment income), and their components and inheritances, while also controlling for specific demographic factors. Results indicate that self-employed individuals hold more household real assets and inheritances than paid employees. However, the self-employed have less household income from other sources and have a lower level of secured loans in comparison with paid employees. The self-employed have higher level unsecured debts than paid employees. The discussion of the results for each component adds a comprehensive understanding to sources of differential household-level finance of self-employed individuals and paid employees in Europe.
The second empirical Chapter disentangles the impact of household wealth on occupational decisions (self-employment vis paid employment). It uses an instrumental variables probit estimation to explore the significance of different types of household wealth and their components on an individual’s decision to be self-employed. Results reveal that, household’s assets and their components and liabilities generally encourage individuals to be self-employed, which adds new evidence to inform how financial constraints can be combatted (Zissimopoulos et al., 2009; Lim, 2018). The volume of household inheritances is not significantly associated with the decision to be self-employed. This Chapter also finds that household income diminishes the likelihood of being self-employed. To date detailed empirical evidence of the impacts identified in this Chapter do not exist in the literature. Therefore, this thesis offers a unique insight into household wealth as a potential financial resource related to the occupational decision to be self-employed.
Lastly, the third empirical Chapter of this thesis investigates the ways in which household wealth impacts on the performance of self-employed businesses using a Heckman two-step estimation procedure. The results indicate that a positive impact is not only evident for total household real assets but also for the components of the real assets. Concerning total household liabilities, it is found to be positively associated with business value. The findings highlight the negative influence of the mortgage on household main residence, implying that pledging your household main residence to secure loans for business use seems to impair business performance. Finally, results suggest a negative association of household income from other sources and business value. By showing how the specific type and components of household-level finance are associated with the performance of self-employed business, this thesis provides novel evidence in a particularly underdeveloped area.
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Keywords
Self-employment , Household wealth , Occupational choice , Business performance , Eurpean countries
Citation
Liu, Y. 2023. The role of household wealth in funding self-employment in European countries. PhD Thesis, University College Cork.