Social capital access and entrepreneurship

We investigate the effect of social capital access on entrepreneurship. Social capital helps entrepreneurs to overcome resource constraints. This is especially important in small communities where we often see a lack of market-oriented institutions such as venture capital firms. Entrepreneurs gain access to social capital via club memberships. Combining differences in the number of individual club memberships with differences in the importance of social capital across communities, we identify a causal small community mark-up effect of individual club memberships on entrepreneurship. Assuming that unobserved heterogeneity that might influence both the individual's selection into clubs and the occupational choice to be an entrepreneur is independent of community size, we find that the effect of club membership on the propensity to be an entrepreneur is 2.6 percentage points larger in small communities than in large communities. Robustness tests support the validity of our identifying assumption and results. (C) 2010 Elsevier B.V. All rights reserved.