Entrepreneurial Risk Choice and Credit Market Equilibria

Heiner Schumacher, Kerstin Gerling and Michal Kowalik

The B.E. Journal of Economic Analysis & Policy, 2015, vol. 15, issue 3, 1455-1480

Abstract: We analyze under what conditions competitive credit markets are efficient in providing loans to entrepreneurs who can start a new project after failure. An entrepreneur of uncertain talent chooses the riskiness of her project. If banks privately observe the entrepreneur’s risk choices, two equilibria coexist: (1) an inefficient equilibrium in which the entrepreneur realizes a low-risk project and has no access to finance after failure and (2) a more efficient equilibrium in which the entrepreneur first realizes high-risk projects and then, after continuous failures, a low-risk project. There is a non-monotonic relationship between bank information and potential credit market inefficiency. We discuss the implications for credit registers and entrepreneurial education.

Keywords: stigma of failure; entrepreneurship; credit markets; asymmetric information (search for similar items in EconPapers)
JEL-codes: C73 G21 M13 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Working Paper: Entrepreneurial risk choice and credit market equilibria (2010)
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DOI: 10.1515/bejeap-2014-0160

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