Advanced Search
MyIDEAS: Login to save this paper or follow this series

Occupational Choice and the Private Equity Premium Puzzle

Contents:

Author Info

  • Hintermaier, Thomas

    (Department of Economics and Finance, Institute for Advanced Studies, Vienna)

  • Steinberger, Thomas

    (European University Institute (EUI))

Abstract

This paper suggests a solution to what has become known as the "private equity premium puzzle" (Moskowitz and Vissing-Jorgensen (2002)). We interpret occupational choice as a dynamic portfolio choice problem of a life-cycle investor facing a liquidity constraint and imperfect information about the profitability of potential businesses. In this setting, becoming an entrepreneur is equivalent to investing in non-traded private equity capital subject to transaction costs. We model the return on private equity as the sum of two components, the individual ability of the entrepreneur and idiosyncratic business risk. Information is imperfect, because only entrepreneurs observe their own business risk realizations. Using numerical techniques we find that the model generates the observed return structure for private equity using standard CRRA-preferences and fully rational expectations.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.ihs.ac.at/publications/eco/es-122.pdf
File Function: First version, 2002
Download Restriction: no

Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 122.

as in new window
Length: 26 pages
Date of creation: Oct 2002
Date of revision:
Handle: RePEc:ihs:ihsesp:122

Contact details of provider:
Postal: Stumpergasse 56, A-1060 Vienna, Austria
Phone: ++43 - (0)1 - 599 91 - 0
Fax: ++43 - (0)1 - 599 91 - 555
Web page: http://www.ihs.ac.at
More information through EDIRC

Order Information:
Postal: Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria

Related research

Keywords: Portfolio choice; Life-cycle models; Private equity;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Dixit, Avinash K. & Pindyck, Robert S. & Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research., 2003. "Expandability, reversibility, and optimal capacity choice," Working papers 97-006WP., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Yannis Bilias & Michael Haliassos, 2004. "The Distribution of Gains from Access to Stocks," CSEF Working Papers 125, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
  4. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
  5. John Y. Campbell & Yeung Lewis Chan & Luis M. Viceira, 2001. "A Multivariate Model of Strategic Asset Allocation," NBER Working Papers 8566, National Bureau of Economic Research, Inc.
  6. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  7. Steven J. Davis & Felix Kubler & Paul Willen, 2006. "Borrowing Costs and the Demand for Equity over the Life Cycle," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 348-362, May.
  8. John Y. Campbell & Joao F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 1999. "Investing Retirement Wealth: A Life-Cycle Model," NBER Working Papers 7029, National Bureau of Economic Research, Inc.
  9. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  10. Andrew B. Abel & Janice C. Eberly, . "A Unified Model of Investment Under Uncertainty," Rodney L. White Center for Financial Research Working Papers 14-93, Wharton School Rodney L. White Center for Financial Research.
  11. Quadrini, Vincenzo, 1999. "The Importance of Entrepreneurship for Wealth Concentration and Mobility," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 45(1), pages 1-19, March.
  12. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
  13. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
  14. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
  15. Ricardo J. Caballero & Mohamad L. Hammour, 1991. "The Cleansing Effect of Recessions," NBER Working Papers 3922, National Bureau of Economic Research, Inc.
  16. Polkovnichenko, Valery, 2004. "Limited stock market participation and the equity premium," Finance Research Letters, Elsevier, vol. 1(1), pages 24-34, March.
  17. Valery Polkovnichenko, 2003. "Human Capital and the Private Equity Premium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 831-845, October.
  18. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  19. Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rior-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
  20. Marianne P. Bitler & Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2005. "Testing Agency Theory with Entrepreneur Effort and Wealth," Journal of Finance, American Finance Association, vol. 60(2), pages 539-576, 04.
  21. David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
  22. Michael Haliassos and Alexander Michaelides, 2001. "Calibration and Computation of Household Portfolio Models," Computing in Economics and Finance 2001 194, Society for Computational Economics.
  23. R. Glenn Hubbard & Kenneth L. Judd, 1985. "Social Security and Individual Welfare: Precautionary Saving, LiquidityConstraints, and the Payroll Tax," NBER Working Papers 1736, National Bureau of Economic Research, Inc.
  24. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
  25. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
  26. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  27. Heaton, John & Lucas, Deborah, 1997. "Market Frictions, Savings Behavior, And Portfolio Choice," Macroeconomic Dynamics, Cambridge University Press, vol. 1(01), pages 76-101, January.
  28. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  29. Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, vol. 77(4), pages 630-46, September.
  30. Evans, David S, 1987. "Tests of Alternative Theories of Firm Growth," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 657-74, August.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Henrekson, Magnus & Sanandaji, Tino, 2008. "Entrepreneurship and the Theory of Taxation," Working Paper Series 732, Research Institute of Industrial Economics, revised 19 Aug 2009.
  2. Fossen, Frank M., 2012. "Risk attitudes and private business equity," Discussion Papers 2012/11, Free University Berlin, School of Business & Economics.
  3. Markus Poschke, 2012. "Who Becomes an Entrepreneur? Labor Market Prospects and Occupational Choice," Cahiers de recherche 13-2012, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  4. Markus Poschke, 2012. "The Labor Market, the Decision to Become an Entrepreneur, and the Firm Size Distribution," Cahiers de recherche 11-2012, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Simoes, Nadia & Moreira, Sandrina B. & Crespo, Nuno, 2013. "Individual Determinants of Self-Employment Entry – What Do We Really Know?," MPRA Paper 48403, University Library of Munich, Germany.
  6. Doriana Ruffino, 2012. "Resuscitating Businessman Risk: A Rationale for Familiarity-Based Portfolios," Carlo Alberto Notebooks 252, Collegio Carlo Alberto.
  7. Thomas Steinberger, 2005. "Social security and entrepreneurial activity," CSEF Working Papers 130, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  8. Claudio Campanale, 2006. "Leraning, life-cycle and entrepreneurial investment," Working Papers. Serie AD 2006-29, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ihs:ihsesp:122. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Doris Szoncsitz).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.