Female Entrepreneurship and Financial Frictions

Businesses are a crucial engine of economic activity and contribute to enhancing productivity, job creation and innovation. However, in the United States, there are still profound gender imbal- ances in entrepreneurship, as women make up only 35% of the entrepreneurial pool. Moreover, sizeable gender gaps persist in other dimensions of firm’s activities, such as financing, which can differently affect female and male-owned enterprises.

Arguably, understanding the determinants of female and male-owned businesses’ trajectories matters for researchers and policy makers, as fostering all entrepreneurial talent is an effective way of promoting economic growth.

In this paper, we focus on credit access and quantify the effect of gender differences in borrowing constraints on both entrepreneurial participation and the allocation of capital across productive units, an aspect that has been understudied by the related macroeconomic literature. We thus seek to answer the following questions: Do female entrepreneurs face more financial constraints than men? How does this affect aggregate productivity and factor allocation? How much would the U.S. economy gain by reducing gender gaps in credit access?

In our empirical analysis, we use the restricted-access version of the Kauffman Firm Survey (KFS), which comprises 5,000 nascent entrepreneurs in the U.S. between 2004 and 2011. First, we find evidence that credit constraints penalize female entrepreneurs relatively more. Not only do they report lower levels of business debt, but among those who apply for a loan, women also face a 10% higher probability of being rejected. Bank loans are the main source of credit for entrepreneurs in our sample, and an impaired access to such credit is likely to harm the business operations of female producers. Interestingly, we can establish that higher loan rejection rates cannot be empiri- cally explained by higher risk or lower profitability of female-led businesses. Second, we document that females have a 12% higher average product of capital relative to males, and run their business with a lower capital-to-labor ratio. Following the established literature on productive inputs misallocation, we interpret this difference as a sign that capital resources do not flow where they can be more productive. Hence, the empirical evidence suggests the presence of gender heterogeneities in financial frictions, which could be responsible for a sub-optimal allocation of capital.

To rationalize these findings, we develop a model of entrepreneurial choice under financial frictions that features agents’ heterogeneity in wealth, productivity and gender. In our framework, individuals choose whether to be workers or to run an enterprise. In particular, entrepreneurs finance their acquisition of capital through debt, and we specifically introduce gender differences in accessing credit, which subjects female entrepreneurs to a tighter borrowing constraint. As a result, women constitute a lower share of total entrepreneurs, as they anticipate to face tighter financial constraints when running a business. And since they are more financially constrained, female entrepreneurs operate with lower levels of capital. Capital misallocation is severe especially if high-productivity female entrepreneurs are frequently credit constrained.

Our simulated model predicts that gender-based financial constraints determine lower female entrepreneurial rates and lower capital-to-labor for female business owners. In particular, the model can explain more than 90% of the empirical gender differences in the average product of capital and in the capital-to-labor in KFS data, while replicating at the same time other empirically relevant features related to debt and wealth distributions, as well as business dynamism. We also use the model to quantify the negative effect of gender imbalance in credit access on capital misallocation, aggregate production and the allocation of entrepreneurial talent for the U.S. economy.

Finally, we use our quantitative framework as a laboratory to run counterfactual experiments along two dimensions. First, we show that if male and female entrepreneurs had equal access to credit, this would improve dramatically the allocation of entrepreneurial talent and total pro- duction in the economy. Specifically, female entrepreneurial rates would increase by 17%, capital misallocation would decrease by 30%, and total production would raise by up to 5.18%. Second, in a different set of counterfactuals, we introducefiscal subsidies, either on the profits, the credit limit or the rental rate of capital of female-owned businesses. Wefind that thesefiscal schemes all foster female entrepreneurship, but the extent to which the effect of gender imbalance infinancial markets can be mitigated efficiently depends on the specific type of subsidy implemented.