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On entrepreneurial risk-taking and the macroeconomic effects of financial constraints

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  • Clemens, Christiane
  • Heinemann, Maik

Abstract

This paper deals with credit market imperfections and idiosyncratic risks in a two-sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk-taking, and social mobility. Contrary to many models in the literature, our comparative static results cover a broad range for financial constraints, from an unrestrained to a perfectly constrained economy. We find substantial gains in output, welfare, and wealth equality associated with credit market improvements. The marginal gains from relaxing constraints are largest for empirically relevant debt-equity ratios. Interestingly, the entrepreneurship rate and social mobility respond non-monotonically to a change in the tightness of financial constraints. The results crucially depend on feedback effects in general equilibrium, where optimal firm sizes and the demand for credit are endogenously determined.

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  • Clemens, Christiane & Heinemann, Maik, 2010. "On entrepreneurial risk-taking and the macroeconomic effects of financial constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1610-1626, September.
    • Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1610-1626
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    Cited by:

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    2. Gokmen, Gunes & Morin, Annaig, 2021. "Investment shocks and inequality dynamics," Economic Modelling, Elsevier, vol. 94(C), pages 570-579.
    3. Wulff, Alexander & Heinemann, Maik, 2015. "Idiosyncratic Risk, Borrowing Constraints and Financial Integration - A Discussion of Ambiguous Results," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113165, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    CGE Occupational choice Financial constraints Wealth distribution;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D3 - Microeconomics - - Distribution
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G0 - Financial Economics - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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