Wealth Effects Versus Credit Constraints As Drivers of Entrepreneurship: Evidence from a Mortgage Reform

Abstract: We study the impact of an exogenous increase in credit on entrepreneurship, using a unique mortgage reform in Denmark. The reform increased individuals’ access to credit without increasing their level of wealth. This allows us to isolate the impact of relaxed credit constraints that are typically confounded with wealth effects in studies of financing constraints in entrepreneurship. Despite having a sizeable increase in access to credit, we find no differential impact on entry rates, entry sizes or the survival or new ventures for those that benefited the most from the reform. Nevertheless, and similar to prior work, we find a strong relationship between increases in housing wealth and entry into entrepreneurship. Our results point to the importance of considering wealth effects in studying entrepreneurship and also suggest that increases in house prices do not necessarily lead to entrepreneurship through the collateral channel.