 Investor protection and business creationAri Hyytinen and Tuomas Takalo International Review of Law and Economics, 2008, vol. 28, issue 2, 113-122 Abstract: We study the effects of investor protection on the cost of external finance, entrepreneurship, and creation of new firms in an equilibrium search model of private capital markets. Besides search frictions, we emphasize moral hazard problems that stem from entrepreneurs' possibilities to expropriate financiers. Investor protection reduces the scope for moral hazard. However, it also constrains the freedom of entrepreneurs to choose projects and to run their own firms. Strengthening investor protection does not therefore always enhance business creation: the results indicate that only when investor protection has a sufficiently large impact on financiers' monitoring cost relative to entrepreneurial freedom does strengthening investor protection enhance start-up creation. We also find a general equilibrium effect, since search frictions amplify the adverse effect of investor protection on business creation. Date: 2008 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:irlaec:v:28:y:2008:i:2:p:113-122 Access Statistics for this article International Review of Law and Economics is currently edited by C. Ott, A. W. Katz and H-B. Schäfer More articles in International Review of Law and Economics from Elsevier |
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