Entrepreneurship, windfall gains and financial constraints: Evidence from Germany

We investigate the link between the propensity to become an entrepreneur and the exogenous release from financial constraints in Germany. This is defined in terms of the movement from employment to self-employment on receipt of a financial windfall. A theoretical framework developing Evans and Jovanovic (1989) is set up and tested with panel data from German households. The results show that financial constraints do exist given that individuals are more likely to start a personal business after receiving a windfall gain. The value of windfall gains has a significant but non linear effect on the decision to become self employed. The data reveal that differences in ability and income affect the change in employment status. We also report that there is no evidence that becoming self-employed involves the anticipation of windfall gains.

Research highlights► Exploring the link between entrepreneurship and financial constraints in Germany. ► The results show that financial constraints do exist. ► Individuals are more likely to start a business after receiving a windfall gain. ► Differences in ability and income affect the change in employment status. ► Becoming self-employed does not involve the anticipation of windfall gains.