On entrepreneurial risk-taking and the macroeconomic effects of financial constraints

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This paper deals with credit market imperfections and idiosyncratic risks in a two-sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk-taking, and social mobility. Contrary to many models in the literature, our comparative static results cover a broad range for financial constraints, from an unrestrained to a perfectly constrained economy. We find substantial gains in output, welfare, and wealth equality associated with credit market improvements. The marginal gains from relaxing constraints are largest for empirically relevant debt-equity ratios. Interestingly, the entrepreneurship rate and social mobility respond non-monotonically to a change in the tightness of financial constraints. The results crucially depend on feedback effects in general equilibrium, where optimal firm sizes and the demand for credit are endogenously determined.

Original languageEnglish
JournalJournal of Economic Dynamics and Control
Issue number9
Pages (from-to)1610-1626
Number of pages17
Publication statusPublished - 10.2010

    Research areas

  • Economics - CGE, Occupational choic, Financial constraints, Wealth distribution