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Entrepreneurship and government subsidies under capital constraints: a general equilibrium analysis

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Author Info
Wenli Li
Abstract

This paper studies the interaction of capital constraints with business formation, growth and destruction, and the policy implications of this interaction. A dynamic general equilibrium model is constructed and shown to be consistent with recent empirical finding on this subject. In the model, agents face uninsurable income risk and costly financial intermediation, and they choose to be either a worker or an entrepreneur. A calibrated version of the model is used to examine two government assistance programs: loan guarantees and grants. The main findings are that both programs can improve welfare and that grants outperform the more popular loan guarantees.

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Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 97-09.

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Date of creation: 1997
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Handle: RePEc:fip:fedrwp:97-09

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Related research
Keywords: Subsidies ; Government lending ; Econometric models;

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  1. V. V. Chari & Mikhail Golosov & Aleh Tsyvinski, 2003. "Business Start-ups, the Lock-in Effect, and Capital Gains Taxation," Levine's Bibliography 506439000000000222, UCLA Department of Economics. [Downloadable!]
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  2. Zuzana Brixiova & Wenli Li, 1998. "Skill Acquisition and Private Firm Creation in Transition Economies," William Davidson Institute Working Papers Series 162, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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