A unified model of entrepreneurship dynamics

Chong Wang, Neng Wang and Jinqiang Yang

Journal of Financial Economics, 2012, vol. 106, issue 1, 1-23

Abstract: We develop an incomplete-markets q-theoretic model to study entrepreneurship dynamics. Precautionary motive, borrowing constraints, and capital illiquidity lead to underinvestment, conservative debt use, under-consumption, and less risky portfolio allocation. The endogenous liquid wealth-illiquid capital ratio w measures time-varying financial constraint. The option to accumulate wealth before entry is critical for entrepreneurship. Flexible exit option is important for risk management purposes. Investment increases and the private marginal value of liquidity decreases as w decreases and exit becomes more likely, contrary to predictions of standard financial constraint models. We show that the idiosyncratic risk premium is quantitatively significant, especially for low w.

Keywords: Idiosyncratic risk premium; q theory of investment; Liquidity constraints; Precautionary saving; Capital illiquidity (search for similar items in EconPapers)
JEL-codes: E22 G11 G31 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (39)

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Working Paper: A Unified Model of Entrepreneurship Dynamics (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:1:p:1-23

DOI: 10.1016/j.jfineco.2012.05.002

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