The impact of consumer credit access on self-employment and entrepreneurship

Kyle Herkenhoff, Gordon M. Phillips, Ethan Cohen-Cole

Research output: Contribution to journalArticlepeer-review

Abstract

We examine how consumer credit affects entrepreneurship by linking three million earnings and pass-through tax records to credit reports. In the cross-section, we show that self-employment without employees and employer firm ownership increase monotonically with credit limits and credit scores. We then isolate individuals who have had discrete increases in credit limits after the exogenous removal of bankruptcy flags to measure the effects of personal credit on entrepreneurship. Following bankruptcy flag removal, individuals are more likely to start a new employer business and borrow extensively. Those who own businesses with employees borrow $40,000 more after bankruptcy flag removal, a 33% gain relative to the sample average.

Original languageEnglish (US)
Pages (from-to)345-371
Number of pages27
JournalJournal of Financial Economics
Volume141
Issue number1
DOIs
StatePublished - Jul 2021

Bibliographical note

Funding Information:
First two authors are in alphabetical order given equal contributions. We are grateful for discussions with Manuel Adelino, Naoki Aizawa, Carter Braxton, Jason Faberman, Andy Glover, Jonathan Heathcote, Johan Hombert, Loukas Karabarbounis, Miles Kimball, Brian Melzer, Javier Miranda, Fabrizio Perri, Ellen McGrattan, Anusha Nath, Ben Pugsley, Victor Rios-Rull, David Robinson, Sam Schulhofer-Wohl, Antoinette Schoar, Kelly Shue, Nawid Siassi, Jialan Wang, Moto Yogo, and Owen Zidar. We thank seminar participants at Alberta, ASU, Berkeley, the Board of Governors, Duke University, FOM conference at USC, Hong Kong University, Konstanz SaM, London Business School, Michigan, the Minneapolis Fed, U. of Missouri, Montreal, NBER-SI, PET, SAET, SED, UT Austin, UNC, the WCEG, and Yale. We thank Brian Littenberg and the Census Bureau for their hospitality and ongoing support. We thank Lauren Phillips for excellent editing services. Herkenhoff and Phillips thank the Washington Center for Equitable Growth (WCEG) and thank the NSF (grant no. SES-1824422) for funding. Cohen-Cole and Phillips thank the NSF (grant no. 0965328) for funding and TransUnion for providing credit data. Any opinions and conclusions expressed herein are those of the author(s) and do not necessarily represent the views of the U.S. Census Bureau, the Federal Reserve Bank of New York, or the Federal Reserve System. All results have been reviewed to ensure that no confidential information has been disclosed. This research uses data from the Census Bureau’s Longitudinal-Employer Household Dynamics Program and was partially supported by the following: National Science Foundation Grants SES-9978093, SES-0339191, and ITR-0427889; National Institute on Aging Grant AG018854; and grants from the Alfred P. Sloan Foundation.

Funding Information:
? First two authors are in alphabetical order given equal contributions. We are grateful for discussions with Manuel Adelino, Naoki Aizawa, Carter Braxton, Jason Faberman, Andy Glover, Jonathan Heathcote, Johan Hombert, Loukas Karabarbounis, Miles Kimball, Brian Melzer, Javier Miranda, Fabrizio Perri, Ellen McGrattan, Anusha Nath, Ben Pugsley, Victor Rios-Rull, David Robinson, Sam Schulhofer-Wohl, Antoinette Schoar, Kelly Shue, Nawid Siassi, Jialan Wang, Moto Yogo, and Owen Zidar. We thank seminar participants at Alberta, ASU, Berkeley, the Board of Governors, Duke University, FOM conference at USC, Hong Kong University, Konstanz SaM, London Business School, Michigan, the Minneapolis Fed, U. of Missouri, Montreal, NBER-SI, PET, SAET, SED, UT Austin, UNC, the WCEG, and Yale. We thank Brian Littenberg and the Census Bureau for their hospitality and ongoing support. We thank Lauren Phillips for excellent editing services. Herkenhoff and Phillips thank the Washington Center for Equitable Growth (WCEG) and thank the NSF (grant no. SES-1824422) for funding. Cohen-Cole and Phillips thank the NSF (grant no. 0965328) for funding and TransUnion for providing credit data. Any opinions and conclusions expressed herein are those of the author(s) and do not necessarily represent the views of the U.S. Census Bureau, the Federal Reserve Bank of New York, or the Federal Reserve System. All results have been reviewed to ensure that no confidential information has been disclosed. This research uses data from the Census Bureau's Longitudinal-Employer Household Dynamics Program and was partially supported by the following: National Science Foundation Grants SES-9978093, SES-0339191, and ITR-0427889; National Institute on Aging Grant AG018854; and grants from the Alfred P. Sloan Foundation.

Publisher Copyright:
© 2021 Elsevier B.V.

Keywords

  • Credit access
  • Entrepreneurship
  • Personal bankruptcy
  • Start-ups

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