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

Christiane Clemens and Maik Heinemann

Journal of Economic Dynamics and Control, 2010, vol. 34, issue 9, 1610-1626

Abstract: 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.

Keywords: CGE; Occupational; choice; Financial; constraints; Wealth; distribution (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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Working Paper: On Entrepreneurial Risk–Taking and the Macroeconomic Effects of Financial Constraints (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:34:y:2010:i:9:p:1610-1626

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