Abstract: Paper No. 190

Financial Capital, Human Capital, and the Transition to Self- Employment: Evidence from Intergenerational Links

Douglas Holtz- Eakin and Thomas Dunn

July 1998

The environment for business creation is central to economic policy, as entrepreneurs are believed to be forces of innovation, employment and economic dynamism. We use data from the National Longitudinal Surveys (NLS) to investigate the relative importance of family financial and human capital in the transition into self-employment. Specifically, we estimate the impacts of own wealth and human capital and parental wealth and self-employment experience on the probability that an individual makes the transition from a wage and salary job to self-employment. We find that young men's own financial assets exert a statistically significant, but quantitatively modest effect on the transition to self-employment. In contrast, the capital of parents exerts a large influence. Parents' strongest effect runs not through financial means, but rather through their own self-employment experience and business success. This link is even stronger along gender lines.

A revised version of this paper appears in the Journal of Labor Economics, Vol. 18, No. 2, April 2000, pp. 282-305.