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The Cost of Failure: An Empirical Look at the Financial Effect of Business Failure on the Self-Employed

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Doctoral thesis

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Despite a long history of research into failure rates and the causes of small business failure, we know very little about the financial consequences of losing a business. In this dissertation I take a longitudinal sample of failed self-employed business owners from the Panel Study of Income Dynamics and compare their wealth accumulation to that of demographically comparable families who have not experienced entrepreneurial failure. Surprisingly, business failure is associated with slightly higher wealth at closure, with the resulting failure bonus dissipating in five years or less. I also conduct exploratory analysis to further characterize the wealth accumulation of failed households and analyze their propensity for subsequent self-employment. The higher wealth observed immediately after failure indicates that the typical household involved in self-employment may still retain a significant amount of the precautionary savings that were accumulated in preparation for an attempt at entrepreneurship. It suggests that although some households undoubtedly do lose money when a business fails, most escape relatively unscathed by exiting quickly rather than persisting in the face of an unfavorable business environment. This behavior has implications for how we interpret liquidity constraints to entrepreneurship, as well as for government policy in support of small businesses.

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  • Economics and Cost Analysis

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