Credit Constraints, Job Mobility and Entrepreneurship: Evidence from a Property Reform in China∗ Job Market Paper

In 1994, the Chinese government began a program that offered state employees living in state-owned housing the opportunity to buy their homes at subsidized prices. This paper analyzes the impact of housing policy and the creation of private property on individuals’ labor market decisions with a focus on entrepreneurship. Using the reform as an exogenous change in the mobility costs and credit constraints that influence entry into entrepreneurship, my estimates suggest that the housing reform significantly increased self-employment. I develop a theoretical framework that incorporates two mechanisms to explain the linkage between housing reform and entrepreneurship. First, I explore the idea that unbundling housing and employment decisions increased labor mobility from the state sector, including transitions into self-employment. Second, I hypothesize that the creation of private property and the wealth effect associated with the subsidized sale increased entrepreneurship by relaxing credit constraints. The empirical evidence in urban China suggests that both mechanisms played a role in increasing self-employment. ∗Email: [email protected]. I am grateful to Chris Udry, Mark Rosenzweig, Joe Altonji and Hanming Fang for their constructive advice and encouragement. This paper has also benefitted from helpful comments from seminar participants at Yale University and the 2007 Summer Workshop in Industrial Organization and Management Strategy. All errors are my own.