Entrepreneurial risk aversion, net worth effects and real fluctuations

Cristian Pardo ()

Review of Financial Economics, 2013, vol. 22, issue 4, 158-168

Abstract: This paper examines the combined effect of asymmetric information and private entrepreneurial risk aversion on investment decisions. The standard optimal debt contract becomes modified by the introduction of insurance and a risk premium that entrepreneurs demand due to the uncertainty of their investment returns: the private equity premium. In general equilibrium, the private equity premium may become a mechanism that magnifies the effects of shocks. A structural estimation of the model's parameters using Chilean and U.S. data shows that the entrepreneurial risk aversion assumption has more empirical relevance in an economy where smaller privately-held businesses are relatively more prevalent than where the corporate sector predominates, like the U.S.

Keywords: Entrepreneurial risk aversion; Asymmetric and private information; Contracts; Business cycles (search for similar items in EconPapers)
JEL-codes: D82 E32 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:revfin:v:22:y:2013:i:4:p:158-168

DOI: 10.1016/j.rfe.2013.05.007

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