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Entrepreneurial Risk Choice and Credit Market Equilibria

Author

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  • Schumacher Heiner

    (Department of Economics and Business, Aarhus University, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark)

  • Gerling Kerstin

    (International Monetary Fund (IMF), 700 19th Street, N.W., Washington, DC 20431, USA)

  • Kowalik Michal

    (Federal Reserve Bank of Boston, 600 Atlantic Ave, Boston, MA 02120, USA)

Abstract

We analyze under what conditions competitive credit markets are efficient in providing loans to entrepreneurs who can start a new project after failure. An entrepreneur of uncertain talent chooses the riskiness of her project. If banks privately observe the entrepreneur’s risk choices, two equilibria coexist: (1) an inefficient equilibrium in which the entrepreneur realizes a low-risk project and has no access to finance after failure and (2) a more efficient equilibrium in which the entrepreneur first realizes high-risk projects and then, after continuous failures, a low-risk project. There is a non-monotonic relationship between bank information and potential credit market inefficiency. We discuss the implications for credit registers and entrepreneurial education.

Suggested Citation

  • Schumacher Heiner & Gerling Kerstin & Kowalik Michal, 2015. "Entrepreneurial Risk Choice and Credit Market Equilibria," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(3), pages 1455-1480, July.
    • Handle: RePEc:bpj:bejeap:v:15:y:2015:i:3:p:1455-1480:n:14
    DOI: 10.1515/bejeap-2014-0160
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    Cited by:

    1. Canidio, Andrea, 2019. "Task Discretion, Labor Market Frictions and Entrepreneurship," CEPR Discussion Papers 13954, C.E.P.R. Discussion Papers.

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