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Private Equity Returns in a Model of Entrepreneurial Choice with Learning

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  • Campanale Claudio

    (Universidad de Alicante)

Abstract

Entrepreneurs invest a large share of their financial wealth in a single business that they personally manage. Despite the large risk implied by this undiversified investment they do not seem to require any extra return on a diversified public equity index. In light of the large public equity premium, this fact poses a new asset pricing puzzle. In the present paper, I use a quantitative model to explore the issue and find that the choice to become entrepreneur can be rationalized even with a negative private equity premium when the full return on entrepreneurial investment is properly accounted for. The key assumption is that the quality of a business project is not precisely known upon entry and is learned over time. As long as it is possible to switch back to paid-employment, it is worth experimenting with entrepreneurship to find out if the project is good even if initially the expected return is low.

Suggested Citation

  • Campanale Claudio, 2010. "Private Equity Returns in a Model of Entrepreneurial Choice with Learning," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-37, July.
    • Handle: RePEc:bpj:bejmac:v:10:y:2010:i:1:n:22
    DOI: 10.2202/1935-1690.1924
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    Cited by:

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    3. Michele Dell'Era & Luca David Opromolla & Luís Santos‐Pinto, 2023. "Can optimism solve the entrepreneurial earnings puzzle?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(1), pages 139-169, January.
    4. Galina Vereshchagina & Hugo A. Hopenhayn, 2009. "Risk Taking by Entrepreneurs," American Economic Review, American Economic Association, vol. 99(5), pages 1808-1830, December.

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