I show that in an economy with entrepreneurship, a rise in public debt and consequent increase in the interest rate can lead to an increase in productivity and economic activity, with limited increases in inequality. The provision of additional liquidity eases financial constraints on productive entrepreneurs, resulting in a ‘crowding in’ of productive capi tal. More households choose to start productive firms, which further augments productive capital investment. When the reallocation of capital to productive entrepreneurs is strong enough, economic output increases. Despite higher profits for entrepreneurs in the top percentiles of the income distribution, increased entry into entrepreneurship also allows low- and middle-income households to increase their share of income and mitigates higher concentration at the top. Increases in income inequality are also moderated by the higher progressive income tax used to finance the rise in public debt. 

Entrepreneur firms are often modeled as subject to financial constraints, but empirical evidence on the existence and form of these constraints is mixed. This paper provides evidence that entrepreneur firm outcomes are indeed dependent on personal wealth. I construct a unique dataset that matches entrepreneur households with their businesses using French administrative data. Analysis of indicators of financial constraints, including entrepreneur firm returns on assets and use of external funds, suggests that higher personal wealth eases constraints and allows an entrepreneur to run a larger firm. Exploiting the panel dimension of the dataset, I find that firm outcomes increase following a rise in household net wealth, particularly for entrepreneur firms that rely on household debt. Constraints also appear to be heterogeneous: an increase in wealth is correlated with more significant increases in firm profits for entrepreneurs with higher education, older firms and smaller firms.