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Credit and self-employment

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Author Info

  • Kartik Athreya
  • Ahmet Akyol

Abstract

Limited personal liability for debts has long been justified as a tool to promote entrepreneurial risk taking by providing insurance to the borrower in the event of low returns. Nonetheless, such limits erode repayment incentives, and so may increase unsecured borrowing costs. Our paper is the first to evaluate the tradeoff between credit costs and insurance against failure. We build a life-cycle model with risky, and repeated, occupational choice in the presence of defaultable debt contracts. We find that limits to liability can encourage self-employment, and alter the timing, size, and financing of self-employment projects. We also find that the positive relationship between wealth and self-employment rates may not be evidence for credit constraints: We show that such a relationship is present even when limited liability is eliminated.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 09-05.

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Date of creation: 2009
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Handle: RePEc:fip:fedrwp:09-05

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Keywords: Bankruptcy ; Self-employed ; Insurance;

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References

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Citations

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Cited by:
  1. Jacob M. Short & Andy Glover, 2011. "Bankruptcy, Incorporation and the Nature of Entrepreneurial Risk," 2011 Meeting Papers 836, Society for Economic Dynamics.
  2. Ximena Peña Parga & Camilo Mondragón-Vélez, 2008. "Business Ownership and Self-Employment in Developing Economies: The Colombian Case," DOCUMENTOS CEDE 004672, UNIVERSIDAD DE LOS ANDES-CEDE.
  3. Mette Ejrn�s & Stefan Hochguertel, 2014. "Insurance, Entrepreneurial Start-Up, and Performance," Tinbergen Institute Discussion Papers 14-040/V, Tinbergen Institute.
  4. Hugo A. Hopenhayn & Galina Vereshchagina, 2003. "Risk Taking by Entrepreneurs," RCER Working Papers 500, University of Rochester - Center for Economic Research (RCER).
  5. Vincenzo Quadrini, 2009. "Entrepreneurship in macroeconomics," Annals of Finance, Springer, vol. 5(3), pages 295-311, June.
  6. Césaire A. Meh & Yaz Terajima, 2008. "Unsecured Debt, Consumer Bankruptcy, and Small Business," Working Papers 08-5, Bank of Canada.
  7. Andrew Glover, 2010. "Bankruptcy, Incorporation, and the Nature of Entrepreneurial Risk," 2010 Meeting Papers 1010, Society for Economic Dynamics.
  8. Mankart, Jochen & Rodano, Giacomo, 2012. "Bankruptcy Law, Debt Portfolios, and Entrepreneurship," Economics Working Paper Series 1216, University of St. Gallen, School of Economics and Political Science.
  9. Ahmet Akyol & Kartik Athreya, 2009. "Self-employment rates and business size: the roles of occupational choice and credit market frictions," Annals of Finance, Springer, vol. 5(3), pages 495-519, June.

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