A Unified Model of Entrepreneurship Dynamics

Chong Wang, Neng Wang and Jinqiang Yang

No 16843, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop an incomplete-markets q-theoretic model to study entrepreneurship dynamics. Precautionary motive, borrowing constraints, and capital illiquidity lead to underinvestment, conservative debt use, under-consumption, and less risky portfolio allocation. The endogenous liquid wealth-illiquid capital ratio w measures time-varying financial constraint. The option to accumulate wealth before entry is critical for entrepreneurship. Flexible exit option is important for risk management purposes. Investment increases and the private marginal value of liquidity decreases as w decreases and exit becomes more likely, contrary to predictions of standard financial constraint models. We show that the idiosyncratic risk premium is quantitatively significant, especially for low w.

JEL-codes: E2 G11 G31 (search for similar items in EconPapers)
Date: 2011-03
Note: AP CF EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as as "A unified model of entrepreneurship dynamics" in Journal of Financial Economics Volume 106, Issue 1, October 2012, Pages 1–23

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Journal Article: A unified model of entrepreneurship dynamics (2012)
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