Investing in entrepreneurs: The case of franchising

Abstract

Whether meant to improve public policy, private lending, or personal choices by individuals, investing in successful entrepreneurs is essential. Successful entrepreneurs typically have high human capital. Investment in entrepreneurs who have lower human capital involves more risk. Research has shown that one type of entrepreneur, franchisees, typically possess lower human capital than entrepreneurs generally. Examining a unique data set of loans by the US government to small businesses, we compare all recipients of these loans, controlling for other relevant lending, economic, and social factors. We find that franchisees have higher default rates and higher lending losses than independents.