The Impact of Debt and Equity on the Decision to be Self-employed – an Economics Perspective

Abstract

This paper substantially extends recent work on the decision to become a self-employed entrepreneur rather than to be an employee of an organization. To enter self-employment typically requires access to financial capital. This article investigates the costs and benefits of different sources of financial capital, and how these may militate for or against the decision to be self-employed. The basic model is extended to accommodate start-up costs, the additional risk associated with the liability of newness, extended time horizons, debt funding, and equity funding. The different implications of debt versus equity funding are explored in detail. We find that preference for one over the other depends not only on their relative costs to the entrepreneur but also on the entrepreneur’s attitudes toward work effort, risk, and autonomy.