Abstract

In spite of an overall increase in minority self-employment, the difference between the percent of self-employed black and white Americans is still striking (11.6% vs 3.8% respectively). We examine whether the availability and types of financing are related to these observed differences, and whether the relative importance of financing methods changes when different stages of the entrepreneurial process are considered.

Our paper contributes to the existing literature by confirming that constraints in commercial financing are a likely cause of racial differences in business ownership. Differently from previous studies, our paper provides evidence based on a panel sample of startups rather than cross sectional data on established businesses and distinguishes between alternative forms of financing. Our paper also stresses the importance of human capital by adding owners’ efforts and correct for endogeneity issues between financing options and probability of failure.

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