Families and Entrepreneurship

Stanford University, Stanford CA

Investigators

Abstract

New businesses are important engines of economic growth. They bring innovative ideas, products, and services to the marketplace. There is a large literature in economics that studies what factors or situations facilitate or prevent entrepreneurship. Since new businesses often require non-negligible starting capital, a key concern is that lack of resources or inability to borrow may prevent some potentially ground-breaking enterprises from emerging. In many countries or industries, venture capital is either missing or tends to overlook projects by women and minorities. From an equity perspective, these may be particularly acute issues for individuals rich in talent but poor in funds. This research investigates whether bequests or gifts from parents to their adult children mitigate formal credit constraints and facilitate business creation. It also studies whether family-financed firms last longer and are more profitable than those created through other means. Answers to these questions can be used to understand to what extent altruism across generations can act as a substitute for poorly functioning credit markets and the importance of the problem of “missing entrepreneurs.” This research is made possible by the availability of rich administrative data on intergenerational transfers, socio-demographic information about donors and recipients, and rich measures of business performance, including the date the new business started. The data offer the opportunity not only to test how important parental transfers are for explaining new business creation, but also to test whether family-funded companies are more or less efficient than those created through more traditional channels. In particular, the research investigates whether parental transfers reflect better (soft) information than that available to formal credit markets as opposed to being a pure consumption good; it also investigates whether such transfers, by imposing a more family-led structure on the newly created business, may end up having a negative impact on its performance. The findings from the empirical analysis are used as inputs into a theoretical model that makes explicit the linkages between altruism across generations, credit market imperfections, and occupational choices. The research uses the model as a laboratory for studying the effect of various economic policies, such as changes in estate taxation, expansion and/or restructuring of governmental loan guarantee programs, and government coverage of old-age risks. The latter are an example of the important trade-offs faced by altruistic parents – often torn between saving for leaving bequests to their children and saving for covering their own long-term health care costs. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.