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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
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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Akyol, Ahmet & Athreya, Kartik, 2011. "Credit and self-employment," Journal of Economic Dynamics and Control, Elsevier, vol. 35(3), pages 363-385, March.
    3. Vincenzo Quadrini, 2000. "Entrepreneurship, Saving and Social Mobility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 1-40, January.
    4. Huggett, Mark & Ventura, Gustavo, 2000. "Understanding why high income households save more than low income households," Journal of Monetary Economics, Elsevier, pages 361-397.
    5. Cesaire Meh, 2005. "Entrepreneurship, Wealth Inequality, and Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(3), pages 688-719, July.
    6. Yaz Terajima, 2005. "Education and Self-Employment: Relationships between Earnings and Wealth Inequality," Computing in Economics and Finance 2005 423, Society for Computational Economics.
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    Cited by:

    1. Konon, Alexander & Kritikos, Alexander S., 2017. "Media and Occupational Choice," IZA Discussion Papers 11015, Institute for the Study of Labor (IZA).

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