Unemployment and Financial Constraints Faced by Small Firms

Philip Jefferson

Economic Inquiry, 1997, vol. 35, issue 1, 108-19

Abstract: A distinguishing feature of small firms is that most small business owners work for themselves and only employ relatives and friends. The author examines conditions under which this labor market practice is an economic outcome and considers the link between this outcome and unemployment. The model is motivated by empirical evidence that suggests that small firms are subject to financial constraints that are supported by information asymmetries. He shows that, in a constrained equilibrium, sole proprietorship and unemployment arise from an information imperfection in the credit market that makes infeasible the consummation of mutually beneficial contracts in the labor market. Copyright 1997 by Oxford University Press.

Date: 1997
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