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Entrepreneurial risk choice and credit market equilibria

Kerstin Gerling, Michal Kowalik and Heiner Schumacher

No RWP 10-13, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We analyze under what condiitons credit markets are efficient in providing loans to entrepreneurs who can start a new project after previous failure. An entrepreneur of uncertain talent chooses the riskiness of her project. If banks cannot perfectly observe the risk of previous projects, two equilibria may coexist: (1) an inefficient equilibrium in which the entrepreneur undertakes a low-risk project and has no access to finance after failure; and (2) a more efficient equilibrium in which the entrepreneur undertakes high-risk projects and gets financed even after an endogenously determined number of failures.

Date: 2010
New Economics Papers: this item is included in nep-ban, nep-ent and nep-ppm
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Journal Article: Entrepreneurial Risk Choice and Credit Market Equilibria (2015) Downloads
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