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Entrepreneurs, Legal Institutions and Firm Dynamics

Neus Herranz, Stefan Krasa and Anne P. Villamil

Centre for Growth and Business Cycle Research Discussion Paper Series from Economics, The University of Manchester

Abstract: This paper assesses quantitatively the impact of legal institutions on entrepreneurial firm dynamics. Owners choose firm size, financial structure and default to manage risk. We find: (i) Less risk averse entrepreneurs run bigger firms and it is optimal for them to incorporate, while more risk averse entrepreneurs run smaller firms and generally are better off remaining unincorporated. (ii) More risk-averse owners tend to default more often than the less risk averse, though they carry less debt. (iii) The model estimates a credit constraint, which binds for many but not all entrepreneurs and matches bank lending criteria. The model also finds modest differences in owner risk aversion, consistent with micro studies.

Pages: 44 pages
Date: 2009
New Economics Papers: this item is included in nep-bec, nep-ent, nep-reg and nep-upt
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