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A unified model of entrepreneurship dynamics

  • Wang, Chong
  • Wang, Neng
  • Yang, Jinqiang

We develop an incomplete-markets q-theoretic model to study entrepreneurship dynamics. Precautionary motive, borrowing constraints, and capital illiquidity lead to underinvestment, conservative debt use, under-consumption, and less risky portfolio allocation. The endogenous liquid wealth-illiquid capital ratio w measures time-varying financial constraint. The option to accumulate wealth before entry is critical for entrepreneurship. Flexible exit option is important for risk management purposes. Investment increases and the private marginal value of liquidity decreases as w decreases and exit becomes more likely, contrary to predictions of standard financial constraint models. We show that the idiosyncratic risk premium is quantitatively significant, especially for low w.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 106 (2012)
Issue (Month): 1 ()
Pages: 1-23

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Handle: RePEc:eee:jfinec:v:106:y:2012:i:1:p:1-23
DOI: 10.1016/j.jfineco.2012.05.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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