Tuesday, December 31, 2013

31/12/2013: Negative equity and entrepreneurship: new evidence

Since the beginning of the crisis, I have written about and presented on the topic of negative equity and its adverse effects on economy and society.

Some of the earlier links on this topic can be found here:

One significant adverse effect of negative equity relates to the impact it has (via investment constraints) on entrepreneurship: http://trueeconomics.blogspot.ie/2010/01/economics-15012010-negative-equity.html

This month, NBER published yet another study on the above topic, covering the issue of property values impact on collateral availability for entrepreneurial activities.

The study, "Housing Collateral and Entrepreneurship" (NBER Working Paper No. w19680) by Martin Schmalz, David Alexandre Spaer and David Thesmar "shows that collateral constraints restrict entrepreneurial activity. Our empirical strategy uses variations in local house prices as shocks to the value of collateral available to individuals owning a house and controls for local demand shocks by comparing entrepreneurial activity of homeowners and renters operating in the same region. We find that an increase in collateral value leads to a higher probability of becoming an entrepreneur."

What is novel to the study results and is also extremely important from economic policy point of view is that "Conditional on entry, entrepreneurs with access to more valuable collateral create larger firms and more value added, and are more likely to survive, even in the long run."

Now, keep in mind - Ireland's politicians and both the previous and current Government officials have been consistently claiming that negative equity only matters when households need to move from their current location to a new residence. In contrast, I have asserted from the start of the crisis that the adverse effects of negative equity are present not only in the context of households moving locations, but also for the households that are staying in their current location and that some of the effects are completely independent from the ability of the households to fund their current mortgages.

Link to the study: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2360948

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