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Entrepreneurial risk choice and credit market equilibria

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  • Heiner Schumacher
  • Michal Kowalik
  • Kerstin Gerling

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.

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File URL: http://www.kansascityfed.org/publicat/reswkpap/pdf/rwp10-13.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 10-13.

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Date of creation: 2010
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Handle: RePEc:fip:fedkrw:rwp10-13

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