Preferences vs Constraints: Generational Transmission of Immigrant Entrepreneurship

Abstract: Why are immigrants more likely to own businesses than natives? Some scholars emphasize immigrants’ “preferences” for entrepreneurship, while others suggest “constraints” and the lack of non-entrepreneurial alternatives. I propose to disentangle the two by leveraging changes in the “Immigrant-Native self-employment gap” across generations—given that labor market constraints are more readily alleviated by second-generation immigrants, while innate preferences are more inheritable, I argue that a decrease in the gap reflects the degree to which constraints dominate preferences. Nationally representative data from the U.S. reveal the following: i) the gap decreases for second-generation immigrants, especially among ethnic groups that face greater labor market frictions; ii) these disadvantaged ethnic groups make greater investment in human capital of their children; and iii) conditional on entering self-employment, second-generation immigrants are more likely to incorporate their businesses relative to their parents. I discuss how these results can be interpreted as how immigrants facilitate upward socioeconomic mobility through investments in entrepreneurship and human capital.