TALENT, WEALTH AND ENTREPRENEURSHIP ROSS LEVINE AND YONA RUBINSTEIN*

Although influential theories suggest that (a) entrepreneurs have unique, highly-valued human capital, (b) liquidity constraints impede entry into entrepreneurship, and (c) entrepreneurship is procyclical, evidence suggests that the self-employed do not have distinctive, highly-remunerated skills, liquidity constraints bind for few, and self-employment is countercyclical. To reconcile gaps between theory and evidence, we develop a model that differentiates between entrepreneurs and other self-employed. The model predicts—and the data confirm—that entrepreneurs are positively selected on highly-valued human capital, but other self-employed are negatively selected on those skills; entrepreneurs are positively selected on collateral, but not other self-employed; and entrepreneurship is procyclical but self-employment is countercyclical.