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Credit Crunches and Credit Allocation in a Model of Entrepreneurship

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  • Marco Bassetto
  • Marco Cagetti
  • Mariacristina De Nardi

Abstract

We study the effects of credit shocks in a model with heterogeneous entrepreneurs, financing constraints, and a realistic firm size distribution. As entrepreneurial firms can grow only slowly and rely heavily on retained earnings to expand the size of their business in this set-up, we show that, by reducing entrepreneurial firm size and earnings, negative shocks have a very persistent effect on real activity. In determining the speed of recovery from an adverse economic shock, the most important factor is the extent to which the shock erodes entrepreneurial wealth.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19296.

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Date of creation: Aug 2013
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Handle: RePEc:nbr:nberwo:19296

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Cited by:
  1. Jonathan E. Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-47, Board of Governors of the Federal Reserve System (U.S.).
  2. Oleg Itskhoki & Benjamin Moll, 2014. "Optimal Development Policies with Financial Frictions," NBER Working Papers 19994, National Bureau of Economic Research, Inc.
  3. Jonathan E. Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2013-31, Board of Governors of the Federal Reserve System (U.S.).

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