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On entrepreneurial risk-taking and the macroeconomic effects of financial constraints

  • Clemens, Christiane
  • Heinemann, Maik

This paper deals with credit market imperfections and idiosyncratic risks in a two-sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk-taking, and social mobility. Contrary to many models in the literature, our comparative static results cover a broad range for financial constraints, from an unrestrained to a perfectly constrained economy. We find substantial gains in output, welfare, and wealth equality associated with credit market improvements. The marginal gains from relaxing constraints are largest for empirically relevant debt-equity ratios. Interestingly, the entrepreneurship rate and social mobility respond non-monotonically to a change in the tightness of financial constraints. The results crucially depend on feedback effects in general equilibrium, where optimal firm sizes and the demand for credit are endogenously determined.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 9 (September)
Pages: 1610-1626

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:9:p:1610-1626
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