The Effect of Physical Collateral and Personal Guarantees on Business Startups

Using microdata for Japan, we examine whether and how financial constraints discourage individuals from starting a business. As proxies for financial constraints, we use prefectural variations in the share of firms using physical collateral and personal guarantees. We find that individuals are less likely to become nascent entrepreneurs if they live in a prefecture with a higher share of firms relying on personal guarantees. In contrast, we do not find a negative link between physical collateral and business startups. Our findings suggest that the low level of entrepreneurship in Japan is due to a lack of risk-taking by potential entrepreneurs rather than a lack of collateralizable assets