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On Entrepreneurial Risk–Taking and the Macroeconomic Effects of Financial Constraints

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Author Info
Christiane Clemens () (University of Hamburg)
Maik Heinemann () (Institute of Economics, University of Lüneburg)

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Abstract

This paper deals with credit market imperfections and idiosyncratic risks in a two–sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk–taking, and social mobility. Contrary to many models in the literature, our comparative static results cover a broad range for borrowing constraints, from an unrestrained to a perfectly constrained economy. In our baseline model, we find substantial gains in output, welfare, and wealth equality associated with credit market improvements. The marginal gains from relaxing constraints are largest for empirically relevant debt–equity ratios. Interestingly, the entrepreneurship rate and social mobility respond non–monotonically to a change in the tightness of financial constraints. The results crucially depend on the degree of income persistence and feedback effects in general equilibrium, where optimal firm sizes and the demand for credit are determined endogenously.

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Publisher Info
Paper provided by University of Lüneburg, Institute of Economics in its series Working Paper Series in Economics with number 103.

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Length: 45 pages
Date of creation: Oct 2008
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Handle: RePEc:lue:wpaper:103

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Related research
Keywords: CGE; occupational choice; financial constraints; wealth distribution;

Other versions of this item:

Find related papers by JEL classification:
C68 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Computable General Equilibrium Models
D3 - Microeconomics - - Distribution
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
D9 - Microeconomics - - Intertemporal Choice and Growth
G0 - Financial Economics - - General
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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References listed on IDEAS
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