Exploring the Factors that Influence Entrepreneurial Activity through a Business Cycle in the United States

Abstract

This study investigates to what extent factors during a business cycle influence the probability of one becoming an entrepreneur. Using United States data from the Panel Study of Income Dynamics (PSID) and the Office of Federal Housing Enterprise Oversight (OFHEO), I find a positive relationship between an individual’s unemployment and the likelihood of self-employment. This relationship can be explained as necessity entrepreneurship, where self-employment is necessary due to the tight labor market conditions. Furthermore, while prior literature points to liquidity constraints as a significant hinderance to entrepreneurial activity, this study finds no such relationship. Using instrumental variables methodology, I show that liquidity constraints do not have a significant effect on the entrepreneurial decision in a business cycle for the average American.