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Entrepreneurial risk, investment and innovation

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Abstract

In this paper I develop a general equilibrium model with risk averse entrepreneurial firms and with public firms. The model predicts that an increase in uncertainty reduces the propensity of entrepreneurial firms to innovate, while it does not affect the propensity of public firms to innovate. Furthermore, it predicts that the negative effect of uncertainty on innovation is stronger for the less diversified entrepreneurial firms, and is stronger in the absence of financing frictions in the economy. In the second part of the paper I test these predictions on a dataset of small and medium Italian manufacturing firms.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1011.

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Date of creation: Dec 2006
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Handle: RePEc:upf:upfgen:1011

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Web page: http://www.econ.upf.edu/

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Keywords: Entrepreneurs; Entrepreneurship; Innovation; Idiosyncratic Risk; Uncertainty; Incomplete Markets;

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Citations

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Cited by:
  1. Dutz, Mark A., 2013. "Resource reallocation and innovation : converting enterprise risks into opportunities," Policy Research Working Paper Series 6534, The World Bank.
  2. Michelacci, Claudio & Schivardi, Fabiano, 2008. "Does Idiosyncratic Business Risk Matter?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6910, C.E.P.R. Discussion Papers.
  3. Hvide, Hans K. & Panos, Georgios A., 2014. "Risk tolerance and entrepreneurship," Journal of Financial Economics, Elsevier, Elsevier, vol. 111(1), pages 200-223.
  4. Christian Chiglino & Nicole Tabasso, 2014. "Risk Aversion in a Model of Endogenous Growth," School of Economics Discussion Papers, School of Economics, University of Surrey 0314, School of Economics, University of Surrey.
  5. Francisco Covas & Shigeru Fujita, 2007. "Private risk premium and aggregate uncertainty in the model of uninsurable investment risk," Working Papers 07-30, Federal Reserve Bank of Philadelphia.
  6. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2011. "Cross-Sectoral Variation in The Volatility of Plant-Level Idiosyncratic Shocks," NBER Working Papers 17659, National Bureau of Economic Research, Inc.

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