2005 Proceedings of the Midwest Business Economics Association 185 HOW PATIENT ARE ENTREPRENEURS? Mohammed Khayum, University of Southern Indiana Joy Peluchette, University of Southern Indiana William Wilding, University of Southern Indiana ABSTRACT This paper investigates the time preferences of entrepreneurs using U.S. cross section data from the 2001 Survey of Consumer Finances. The findings indicate that there is a statistically significant relationship between the rate of time preference of entrepreneurs and their age, years of education, and their degree of risk aversion. No statistically significant relationship was found between the rate of time preference of entrepreneurs and their networth and being female. INTRODUCTION According to the 2001 Survey of Consumer Finances, the wealth distribution of U.S. households is highly skewed. While households in the top 5 percent of the wealth distribution hold more than 50 percent of the total wealth in the economy, households in the lower half of the wealth distribution hold about 2.8 percent of total wealth. 1 At the same time, entrepreneurs 2 account for about 12.4 percent of the household population and hold 41.9 percent of total wealth. In addition, entrepreneurs account for about 51 percent of the households in the top 5 percent of the wealth distribution and about 57 percent of the wealth held by that top fifth percentile. Entrepreneurs, therefore, constitute a relatively large fraction of the very wealthy and consideration of their saving behavior is 1 Calculations based on the 2001 Survey of Consumer Finances. The survey is publicly available from the Federal Reserve Board website at http://www.federalreserve.gov/pubs/oss/oss2/scfindex. html. 2 In this paper, entrepreneurs are defined as those who own or share ownership in a business and have an active management role. increasingly viewed as an important ingredient in models of wealth accumulation and wealth inequality (Cagetti and De Nardi, 2003). Economic theory suggests that individuals who value the future more highly than others are more likely to make certain types of decisions today (e.g. the saving/consumption allocation problem) which ultimately involves forfeiting additional goods in the present to enjoy goods in the future. The rate of time preference measures whether individuals value current events more than future events, with a value of zero indicating indifference between present and future consumption, and larger values suggesting that individuals place less value on future consumption. Thus, as individuals save more in the current period (that is, forego present consumption), they increase their chance of higher future consumption and provide a signal about their time preference. The frequently used assumption of a direct relationship between savings and wealth accumulation in economic theory suggests that there is an inverse relationship between the rate of time preference and the wealth of individuals. Since U.S. entrepreneurs on average, are in the upper end of the wealth distribution, the implication is that on average, these individuals have lower rates of time preference than others in the population. Moreover, based on evidence of substantial concentration in the wealth distribution of entrepreneurs (Quadraini and Rios-Rull, 1997), there is the added implication of heterogeneity among entrepreneurs with regard to their time preferences. Given these considerations, the objectives of this paper are to investigate choices by entrepreneurs that provide insights