Why Did the Private Business Equity Share Fall in Canada&quest

Jie Zhou

Eastern Economic Journal, 2011, vol. 37, issue 2, 197-213

Abstract: Using surveys on family assets and debts in Canada, we document a significant decline in the private business equity share of total assets and net worth between 1984 and 1999 for households and entrepreneurs. We propose an explanation based on recent financial developments that allow financial intermediaries to better screen and monitor private business borrowers. We also study an incentive model of financial intermediation. The model relies on three key factors: risk aversion, moral hazard, and monitoring. We show that as monitoring costs decrease due to financial developments, entrepreneurs will commit less of their own wealth to private business, and the debt ratio of private business increases.

Date: 2011
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