Consumption Propensity and Entrepreneurship: The Perspective of Capital Constraint and Social Connection

Individuals who spend a large percentage of their incomes on consumption are perceived to prefer risks. Since entrepreneurs are well-recognized as risk takers, this paper investigates whether consumption propensity is associated with entrepreneurship. Using micro-level data from Chinese Household Income Project in 2013, we find that households with a higher income-consumption ratio on average have a higher preference for risk-seeking, while they have a lower probability to be entrepreneurs. However, households who have higher consumption-income ratio and are in the top 10 percent of the wealth distribution are more likely to embark on entrepreneurship. In addition, we find that in-system connection (relationship with government-related units) decreases the likelihood of starting new business, while outside-system connection (relationship with market units) increases it. These findings suggest that in an imperfect financial market, start-up finance and connections play important roles for entrepreneurship.