Why Do Financial Constraints Bind for Entrepreneurs and the Self-Employed?

We examine whether entrepreneurs and other self-employed face different financial constraints. We exploit novel corporate registry data that separates incorporations (reflecting entrepreneurship) and business registrations (reflecting self-employment). We match this data to lottery winner data to analyze the impact of loosening financial constraints on business starts. We find that the dollar magnitude of a lottery win increases winners’ registration and incorporation immediately after the win. However, there are significant differences in these effects (1) at different points in the business cycle, (2) based on the individual’s past business experience, and (3) for areas with and without access to local banks.