Housing Collateral and Entrepreneurship Martin Schmalz David Sraer David Thesmar University of Michigan Princeton HEC Paris 16 November 2013 Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 1 / 27
Motivation Strong correlation between wealth and propensity to start / keep / grow a business ◮ e.g. Evans and Jovanovic (1989); Holtz-Eakin et al. (1993), many others Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 2 / 27
Motivation Strong correlation between wealth and propensity to start / keep / grow a business ◮ e.g. Evans and Jovanovic (1989); Holtz-Eakin et al. (1993), many others Evidence for financial constraints Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 2 / 27
Motivation Strong correlation between wealth and propensity to start / keep / grow a business ◮ e.g. Evans and Jovanovic (1989); Holtz-Eakin et al. (1993), many others Evidence for financial constraints? Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 2 / 27
Motivation Strong correlation between wealth and propensity to start / keep / grow a business ◮ e.g. Evans and Jovanovic (1989); Holtz-Eakin et al. (1993), many others Evidence for financial constraints? Hurst and Lusardi (2004) Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 2 / 27
Motivation Strong correlation between wealth and propensity to start / keep / grow a business ◮ e.g. Evans and Jovanovic (1989); Holtz-Eakin et al. (1993), many others Evidence for financial constraints? Hurst and Lusardi (2004): or business opportunities? Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 2 / 27
Motivation Strong correlation between wealth and propensity to start / keep / grow a business ◮ e.g. Evans and Jovanovic (1989); Holtz-Eakin et al. (1993), many others Evidence for financial constraints? Hurst and Lusardi (2004): or business opportunities? Are financing constraints a barrier to entrepreneurship? How big? Should we care? Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 2 / 27
Motivation Strong correlation between wealth and propensity to start / keep / grow a business ◮ e.g. Evans and Jovanovic (1989); Holtz-Eakin et al. (1993), many others Evidence for financial constraints? Hurst and Lusardi (2004): or business opportunities? Are financing constraints a barrier to entrepreneurship? How big? Should we care? Policy implications ◮ Subsidize small business (financing)? ◮ e.g. SBA in the U.S. Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 2 / 27
Does collateral supply matter for macro? Theory: Yes ◮ Bernanke and Gertler (1986); Kiyotaki and Moore (1995) Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 3 / 27
Does collateral supply matter for macro? Theory: Yes ◮ Bernanke and Gertler (1986); Kiyotaki and Moore (1995) Empirically: Yes Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 3 / 27
Does collateral supply matter for macro? Theory: Yes ◮ Bernanke and Gertler (1986); Kiyotaki and Moore (1995) Empirically: Yes ◮ Affects investment: Gan (2007a); Chaney et al. (2012) Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 3 / 27
Does collateral supply matter for macro? Theory: Yes ◮ Bernanke and Gertler (1986); Kiyotaki and Moore (1995) Empirically: Yes ◮ Affects investment: Gan (2007a); Chaney et al. (2012) ◮ Affects consumption / non tradables: Mian et al. (2011) Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 3 / 27
Does collateral supply matter for macro? Theory: Yes ◮ Bernanke and Gertler (1986); Kiyotaki and Moore (1995) Empirically: Yes ◮ Affects investment: Gan (2007a); Chaney et al. (2012) ◮ Affects consumption / non tradables: Mian et al. (2011) ◮ Affects bank lending: Gan (2007b) Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 3 / 27
Does collateral supply matter for macro? Theory: Yes ◮ Bernanke and Gertler (1986); Kiyotaki and Moore (1995) Empirically: Yes ◮ Affects investment: Gan (2007a); Chaney et al. (2012) ◮ Affects consumption / non tradables: Mian et al. (2011) ◮ Affects bank lending: Gan (2007b) What about entrepreneurship? We look at a representative sample of entrepreneurs and offer a novel identification Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 3 / 27
Our story and results The Economist (10/21/13): “Higher home prices can stoke the economy by providing owners with more valuable collateral to borrow against (...); many entrepreneurs fund their business this way.” Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 4 / 27
Our story and results The Economist (10/21/13): “Higher home prices can stoke the economy by providing owners with more valuable collateral to borrow against (...); many entrepreneurs fund their business this way.” We find that increased collateral values lead owners to start more businesses start larger businesses survive longer stay larger – also in the long run Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 4 / 27
Contribution to the entrepreneurship literature (I) What we already know: House prices are correlated with small business growth Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 5 / 27
Contribution to the entrepreneurship literature (I) What we already know: House prices are correlated with small business growth ◮ Business starts: Balasubramanyan and Coulson (2012) Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 5 / 27
Contribution to the entrepreneurship literature (I) What we already know: House prices are correlated with small business growth ◮ Business starts: Balasubramanyan and Coulson (2012) ◮ Small establishments: Adelino et al. (2013) Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 5 / 27
Contribution to the entrepreneurship literature (I) What we already know: House prices are correlated with small business growth ◮ Business starts: Balasubramanyan and Coulson (2012) ◮ Small establishments: Adelino et al. (2013) ◮ ... but house prices also correlated with local economic conditions Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 5 / 27
Contribution to the entrepreneurship literature (I) What we already know: House prices are correlated with small business growth ◮ Business starts: Balasubramanyan and Coulson (2012) ◮ Small establishments: Adelino et al. (2013) ◮ ... but house prices also correlated with local economic conditions Contribution: We control by comparing owners vs renters within region 1 Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 5 / 27
Contribution to the entrepreneurship literature (I) What we already know: House prices are correlated with small business growth ◮ Business starts: Balasubramanyan and Coulson (2012) ◮ Small establishments: Adelino et al. (2013) ◮ ... but house prices also correlated with local economic conditions Contribution: We control by comparing owners vs renters within region 1 ◮ Compare that difference across regions Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 5 / 27
Contribution to the entrepreneurship literature (I) What we already know: House prices are correlated with small business growth ◮ Business starts: Balasubramanyan and Coulson (2012) ◮ Small establishments: Adelino et al. (2013) ◮ ... but house prices also correlated with local economic conditions Contribution: We control by comparing owners vs renters within region 1 ◮ Compare that difference across regions Representative sample of new business starts → macro 2 Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 5 / 27
Contribution to the entrepreneurship literature (I) What we already know: House prices are correlated with small business growth ◮ Business starts: Balasubramanyan and Coulson (2012) ◮ Small establishments: Adelino et al. (2013) ◮ ... but house prices also correlated with local economic conditions Contribution: We control by comparing owners vs renters within region 1 ◮ Compare that difference across regions Representative sample of new business starts → macro 2 Direct evidence on size at creation and long-run effects 3 Schmalz / Sraer / Thesmar (UM / P / HEC) Housing Collateral and Entrepreneurship 16 November 2013 5 / 27
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