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The Aggregate Costs of Uninsurable Business Risk

Author

Listed:
  • Corina Boar
  • Denis Gorea
  • Virgiliu Midrigan

Abstract

We use firm-level data to document that private businesses experience large fluctuations in their profit shares. These are due to large, fat-tailed, and transitory changes in output that are not fully accompanied by changes in their inputs. We interpret this evidence using a model of entrepreneurial dynamics. Because firms can limit their exposure to risk by operating at a smaller scale, our model predicts large macroeconomic losses from uninsurable business risk,much larger than those stemming from credit constraints. While self-financing allows entrepreneurs to quickly overcome credit constraints, even wealthy entrepreneurs remain considerably exposed to risk.

Suggested Citation

  • Corina Boar & Denis Gorea & Virgiliu Midrigan, 2026. "The Aggregate Costs of Uninsurable Business Risk," American Economic Review, American Economic Association, vol. 116(7), pages 2604-2642, July.
    • Handle: RePEc:aea:aecrev:v:116:y:2026:i:7:p:2604-42
    DOI: 10.1257/aer.20230849
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    More about this item

    JEL classification:

    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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