TY - JOUR

T1 - On entrepreneurial risk-taking and the macroeconomic effects of financial constraints

AU - Clemens, Christiane

AU - Heinemann, Maik

PY - 2010/10

Y1 - 2010/10

N2 - 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.

AB - 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.

KW - Economics

KW - CGE

KW - Occupational choic

KW - Financial constraints

KW - Wealth distribution

UR - http://www.scopus.com/inward/record.url?scp=77956786783&partnerID=8YFLogxK

U2 - 10.1016/j.jedc.2010.06.015

DO - 10.1016/j.jedc.2010.06.015

M3 - Journal articles

VL - 34

SP - 1610

EP - 1626

JO - Journal of Economic Dynamics and Control

JF - Journal of Economic Dynamics and Control

SN - 0165-1889

IS - 9

ER -