Job market paper
Knockin’ on Bank’s Door: Why is Self-Employment Going Down?
This study analyzes the decline in the ability to obtain financing as a potential explanation for the observed decrease in U.S. self-employment. To evaluate the impact of credit market accessibility on entry into self-employment, I develop a three-sector Roy model that differentiates between two types of self-employed: entrepreneurs who are owners of businesses that demand physical capital and business loans (Type-1) and other self-employed (Type-2). Using a novel data source (the Community Advantage Panel Survey database), I estimate the dynamic multinomial logit model of employment with correlated random effects and find that proximity of credit market institutions has heterogeneous effects on the transition to self- employment depending on the type of self-employed. The improvement in the credit-market accessibility increases the transition to Type-1 self-employment, decreases the transition to Type-2 self-employment, and increases the probability of transition from Type-2 self- employment to paid-employment. The paper discusses the implications of these results for different policies.