A scenario approach on debt financing and entrepreneurial career path choice

Abstract

Entrepreneurship can be understood as an outside option of working as an employed because individuals are inclined to become workers in pursuit of stable incomes rather than exploring unstable entrepreneurial successes. Entrepreneurial courage is a mechanism to afford startup risk while relinquishing comparatively stable compensation earned from worker status. Intrinsically, entrepreneurship is a biased job career path pursuing entrepreneurial courage and so only those who have optimistic view may choose entrepreneurial career path. A critical factor deters entrepreneurial courage is debt financing. Due to lack in initial resources, debt financing is inevitable to potential entrepreneurs, which becomes to affect entrepreneurial returns drastically. This paper scrutinizes the role of debt financing in individuals’ career path choice path decision. In particular, a decision criterion for choosing entrepreneurial career paths is explored while demonstrating individuals have conservative attitudes on entrepreneurship. Generically, individuals are not willing to choose ST because debt financing is a heavy burden, which is typically larger than the stable compensation from worker status, to potential entrepreneurs. Nevertheless, ironically, debt financing is an inevitable process to become entrepreneur and individuals become to take risk taking attitude when they have to rely on a larger scale debt financing than the stable compensation. Thus, debt burden itself cannot be attributed to an obstacle to enhance entrepreneurship. Also, in the long-run, as the more individuals are patient and the higher the probability to earn higher incomes from entrepreneurship, then individuals are more likely to run own startups. These theoretic predictions are empirically tested under a scenario approach. Main empirical findings suggest that, first, entrepreneurial income can play an important role in inducing entrepreneurship and, second, a higher entrepreneurial success probability can compensate for debt financing burden.