The Effect of Physical Collateral and Personal Guarantees on Business Startups

We examine whether financial constraints discourage individuals from starting a business, using micro data for Japan. As proxies for financial constraints, we use prefectural variations in the share of firms using physical collateral and personal guarantees. We find that individuals are less likely to become nascent entrepreneurs if they live in a prefecture with a higher share of firms relying on personal guarantees. In contrast, we do not find a negative link between physical collateral and business startups. Our findings suggest that the low level of entrepreneurship in Japan is due to a lack of risk-taking by potential entrepreneurs.

Forthcoming: Honjo, Yuji, Arito Ono, and Daisuke Tsuruta. "The effect of physical collateral and personal guarantees on business startups," Journal of Economics and Business.