The Evans and Jovanovic Equivalence Theorem and Credit Rationing: Another Look

In their well-known paper on liquidity constraints, Evans and Jovanovic (1989), argue that under certain assumptions an equivalence relation exists between the probability of switching from wage- into self-employment and assets of the entrepreneur. That is, if and only if there are liquidity constra...

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Bibliographic Details
Published in:Small business economics 1999-06, Vol.12 (4), p.295-297
Main Author: Cressy, Robert
Format: Article
Language:English
Subjects:
Bank assets
Bank capital
Borrowing
Credit rationing
Economic theory
Employment
Entrepreneurs
Entrepreneurship
Finance
Human capital
Liquidity
Profits
Rationing
Self employment
Small business
Start up firms
Startups
Studies
Wages
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Summary:In their well-known paper on liquidity constraints, Evans and Jovanovic (1989), argue that under certain assumptions an equivalence relation exists between the probability of switching from wage- into self-employment and assets of the entrepreneur. That is, if and only if there are liquidity constraints is the probability of switching a function of the individual's assets. The present paper amends this proposition by showing in a simple diagram that if the probability of switching depends on assets then capital constraints are implied in their model; but not vice versa. This apparently trivial correction is shown to have important implications for empirical work. Under some circumstances alternative tests need to be employed to establish the existence or otherwise of credit rationing. One such test is discussed.
ISSN:0921-898X
1573-0913
DOI:10.1023/A:1008064210706