Credit and self-employment

Kartik Athreya () and Ahmet Akyol ()

No 09-05, Working Paper from Federal Reserve Bank of Richmond

Abstract: Limited personal liability for debts has long been justified as a tool to promote entrepreneurial risk taking by providing insurance to the borrower in the event of low returns. Nonetheless, such limits erode repayment incentives, and so may increase unsecured borrowing costs. Our paper is the first to evaluate the tradeoff between credit costs and insurance against failure. We build a life-cycle model with risky, and repeated, occupational choice in the presence of defaultable debt contracts. We find that limits to liability can encourage self-employment, and alter the timing, size, and financing of self-employment projects. We also find that the positive relationship between wealth and self-employment rates may not be evidence for credit constraints: We show that such a relationship is present even when limited liability is eliminated.

Keywords: Bankruptcy; Self-employed; Insurance (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-dge and nep-ent
Date: 2009
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