The aggregate costs of uninsurable business risk

Corina Boar, Denis Gorea and Virgiliu Midrigan

No 1300, BIS Working Papers from Bank for International Settlements

Abstract: We use firm-level data to document that private businesses experience large fluctuations in their profit shares. These are due to large, fat-tailed and transitory changes in output that are not fully accompanied by changes in their inputs. We interpret this evidence using a model of entrepreneurial dynamics. Because firms can limit their exposure to risk by operating at a smaller scale, our model predicts large macroeconomic losses from uninsurable business risk, much larger than those stemming from credit constraints. While self-financing allows entrepreneurs to quickly overcome credit constraints, even wealthy entrepreneurs remain considerably exposed to risk.

Keywords: entrepreneurship; risk; credit constraints; misallocation (search for similar items in EconPapers)
JEL-codes: E2 E44 G32 (search for similar items in EconPapers)
Date: 2025-10
New Economics Papers: this item is included in nep-sbm
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