Self-employment and windfall gains in Britain: Evidence from panel data

Liquidity constraints can affect self-employment in a number of ways. They can prohibit potential entrepreneurs from starting up in business, they can restrict the growth of existing entrepreneurial activities and, in the extreme, they can result in small business failure. This paper uses British panel data to investigate the effects of relaxing liquidity constraints on selfemployment through the unanticipated receipt of windfall gains. The results suggest that the amount of payment received has a positive and concave effect on the probability of entering self-employment and on the performance of an existing self-employment enterprise, consistent with the liquidity constraint hypothesis. Acknowledgements: The author would like to thank Alison Booth and Stephen Jenkins for helpful comments. This paper derives from an Institute for Labour Research programme on “Labour Market Dynamics in a Changing Environment” funded by the Leverhulme Trust, and from a TSER programme on “Labour Demand, Education and the Dynamics of Social Exclusion”.