Academic journal article Economic Perspectives

Evidence on Entrepreneurs in the United States: Data from the 1989-2004 Survey of Consumer Finances

Academic journal article Economic Perspectives

Evidence on Entrepreneurs in the United States: Data from the 1989-2004 Survey of Consumer Finances

Article excerpt

Introduction and summary

A country's national saving rate is a crucial determinant of its ability to accumulate capital and generate growth; hence, it is an important determinant of the country's future prosperity. Another important determinant of a country's prosperity is innovation--the ability to generate new goods and services and provide existing ones in a more efficient manner. Accordingly, it is vital to study the households that are savers, as well as the managers of the businesses that are innovators. In this article, we consider the behavior of a group of individuals who play both roles in the U.S. economy--entrepreneurs.

First, entrepreneurs accumulate capital. As noted by Quadrini (1999, 2000), on average, entrepreneurs save a good deal more than other households: Even though households headed by entrepreneurs make up only 7-8 percent of the population, they own nearly one-third of the wealth in the United States.

Second, entrepreneurial risk-taking is thought to be an important way that individuals with skills, ideas, and business savvy introduce new products, technologies, and business strategies into the economy. This is the entrepreneur described by economists such as Schumpeter (1934) and Knight (1921). Such individuals are willing to put their financial well-being on the line in risky business ventures, with the expectation of earning large returns and expanding their wealth.

A third important feature of entrepreneurship is that the business owner's personal skills and financial resources are much more closely linked to the operations and performance of the firm than is the case with owners of widely held publicly traded corporations. Most shareholders of public firms have little say in the management of the business; and because their risk exposure is limited to the value of their shares, their personal portfolios are irrelevant to the assessment of the firm's creditworthiness. In contrast, entrepreneurs' relationships with their businesses are anything but at arm's length. As managers, they make all of the day-to-day decisions about the firms' operations. As owners, they reap most of the rewards of success, but in many cases, their personal assets help finance the business and are at risk if the business fails. This means that there is a fundamental and bi-directional link between entrepreneurial households' portfolios and the performance of their businesses.

In this article, we present a number of stylized facts that can help us understand the roles that entrepreneurs play in the U.S. economy. First, we construct an empirical counterpart to Schumpeter and Knight's notion of the entrepreneur in the context of the information collected by the Federal Reserve Board's Survey of Consumer Finances (SCF).

Second, we use the SCF data to document a number of facts about entrepreneurs and the businesses that they run. We show that entrepreneurs, as a group, are very rich. They account for about 30 percent of the households in the top decile of the wealth distribution in the United States. They also earn more income than others, though the disparity is not as great as it is for wealth. They hold about as much total net wealth relative to their income as other rich people. Entrepreneurs also fall into two demographic categories that have more wealth than the population as a whole; that is, they are more educated and less likely to be a minority than the general population. Looking at their businesses, we see entrepreneurs operating in a wide range of industries. We also find large changes in the legal organization of their firms over time, with more of them being organized as less risky limited liability entities.

Third, we shed light on how entrepreneurs' success in business affects their personal wealth. The vast majority of entrepreneurs start their own businesses as opposed to buying or inheriting them--an indication that the businesses' performance reflects the entrepreneurs' personal skills. …

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