Entrepreneurship and risk aversion

Evans and Jovanovic (1989, Journal of Political Economy 97(4), 808-827) find that wealth is an important determinant of business startups due to liquidity constraints. However, Cressy (2000, Economic Letters 66, 235-240) argues that if risk aversion is a negative function of wealth, Evans and Jovanovic's empirical results could be spurious and the positive effect of wealth could be due to the omission of risk aversion in the regression equation. In other words, according to Cressy, one's wealth does not have any effect on business startups once the degree of risk aversion is accounted for. This paper attempts to investigate the validity of Cressy's conjecture. We empirically examine the effect of wealth on the transition into self-employment, while allowing for the effect of risk aversion. Our empirical findings show that Evans and Jovanovic's (1989) results are robust, i.e., wealth has a positive effect on business startups even allowing for the confounding effects of risk aversion.