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Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship

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Author Info
Anna L. Paulson
Robert M. Townsend
Alexander Karaivanov

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Abstract

We present and estimate a model in which the choice between entrepreneurship and wage work may be influenced by financial market imperfections. The model allows for limited liability, moral hazard, and a combination of both constraints. The paper uses structural techniques to estimate the model and identify the source of financial market imperfections using data from rural and semiurban households in Thailand. Structural, nonparametric, and reduced-form estimates provide independent evidence that the dominant source of credit market imperfections is moral hazard. We reject the hypothesis that limited liability alone can explain the data.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 114 (2006)
Issue (Month): 1 (February)
Pages: 100-144
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Handle: RePEc:ucp:jpolec:v:114:y:2006:i:1:p:100-144

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  1. Mette Ejrnæs & Gabriel Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample," CAM Working Papers 2008-02, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics. [Downloadable!]
  2. Naude, Wim, 2007. "Peace, Prosperity, and Pro-Growth Entrepreneurship," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  3. Naude, Wim, 2008. "Entrepreneurship in Economic Development," Working Papers RP2008/20, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  4. Simon C. Parker & C. Mirjam van Praag, 2006. "The entrepreneur’s mode of entry: Business takeover or new venture start?," Papers on Entrepreneurship, Growth and Public Policy 2006-26, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group. [Downloadable!]
    Other versions:
  5. Gries, Thomas & Naude, Wim, 2008. "Entrepreneurship and Structural Economic Transformation," Working Papers RP2008/62, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  6. Demirguc-Kunt, Asli & Klapper, Leora F. & Panos, Georgios A., 2009. "Entrepreneurship in post-conflict transition : the role of informality and access to finance," Policy Research Working Paper Series 4935, The World Bank. [Downloadable!]
  7. Kiminori Matsuyama, 2007. "Aggregate Implications of Credit Market Imperfections," NBER Working Papers 13209, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Raquel Fonseca & Pierre-Carl Michaud & Thepthida Sopraseuth, 2007. "Entrepreneurship, Liquidity Constraints and Start-up Costs," Social and Economic Dimensions of an Aging Population Research Papers 173, McMaster University. [Downloadable!]
  9. Mette Ejrnaes & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance," Tinbergen Institute Discussion Papers 08-065/3, Tinbergen Institute. [Downloadable!]
  10. Gries, Thomas & Naude, Wim, 2008. "Entrepreneurship and Regional Economic Growth: Towards A General Theory of Start-Ups," Working Papers RP2008/70, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  11. Sylvain Champonnois, 2006. "Comparing financial systems - a structural analysis," Working Paper Series 702, European Central Bank. [Downloadable!]
    Other versions:
  12. Douglas L. Miller & Anna Paulson, 2007. "Risk taking and the quality of informal insurance: gambling and remittances in Thailand," Working Paper Series WP-07-01, Federal Reserve Bank of Chicago. [Downloadable!]
  13. Demirguc-Kunt, Asli & Levine, Ross, 2009. "Finance and inequality : theory and evidence," Policy Research Working Paper Series 4967, The World Bank. [Downloadable!]
    Other versions:
  14. Hvide, Hans K & Møen, Jarle, 2007. "Liquidity Constraints and Entrepreneurial Performance," CEPR Discussion Papers 6495, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  15. Gries, Thomas & Naude, Wim, 2009. "When to Start a New Firm?: Modelling the Timing of Novice and Serial Entrepreneurs," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  16. Kaivan Munshi, 2007. "From Farming to International Business: The Social Auspices of Entrepreneurship in a Growing Economy," NBER Working Papers 13065, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  17. Raquel Fonseca & Pierre-Carl Michaud & Thepthida Sopraseuth, 2007. "Entrepreneurship, Wealth, Liquidity Constraints and Start-up Costs," IZA Discussion Papers 2874, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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