Entrepreneurial Choice and Knightian Uncertainty with Borrowing Constraints

Takanori Adachi () and Takao Asano ()
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Takanori Adachi: School of Economics, Nagoya University
Takao Asano: Faculty of Economics, Okayama University

No 803, KIER Working Papers from Kyoto University, Institute of Economic Research

Abstract: This paper studies the effects of Knightian uncertainty, or ambiguity, on entrepreneurial choice. By distinguishing between risk and ambiguity, we first show that ambiguity aversion makes it less likely that an individual will become an entrepreneur. It is also shown that an increase in ambiguity unambiguously reduces the amount of investment. In the presence of borrowing constraints, the less ambiguity averse is the individual, the more likely is his or her investment to be constrained. More importantly, constrained wage workers, who would become entrepreneurs in the absence of credit market imperfection, emerge if and only if the market wage is high enough. These individuals are characterized by an intermediate degree of ambiguity aversion. When interpreting these constrained wage workers as managerial and professional workers, our model predicts the rise of such workers in the process of economic development.

Keywords: Entrepreneurship; Knightian Uncertainty; Risk; Borrowing Constraints (search for similar items in EconPapers)
JEL-codes: D8 L26 (search for similar items in EconPapers)
Date: 2011-12
New Economics Papers: this item is included in nep-ent, nep-mic and nep-upt
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