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Irrational Exuberance, Entrepreneurial Finance and Public Policy

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  • Marta Coelho
  • David de Meza
  • Diane Reyniers

Abstract

Unrealistic optimism is a well documented phenomenon. This paper argues that it is important in many economic contexts. Focusing on start-up finance for businesses, optimism may be responsible for or consistent with features such as credit rationing or redlining that are normally taken as symptoms of under-provision of finance requiring intervention to expand lending. Optimism leads to the opposite conclusion, at least if it is legitimate to use fiscal policy to counteract systematic error. The paper reports on an experiment in which, due to optimism, the lower the prizes to entrepreneurial activity the higher the subject's expected income.

Suggested Citation

  • Marta Coelho & David de Meza & Diane Reyniers, 2004. "Irrational Exuberance, Entrepreneurial Finance and Public Policy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 11(4), pages 391-417, August.
  • Handle: RePEc:kap:itaxpf:v:11:y:2004:i:4:p:391-417
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    References listed on IDEAS

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    1. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
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    9. Fan, Wei & White, Michelle J, 2003. "Personal Bankruptcy and the Level of Entrepreneurial Activity," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 543-567, October.
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    Citations

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    Cited by:

    1. Vesa Kanniainen & Panu Poutvaara, 2007. "Imperfect Transmission of Tacit Knowledge and other Barriers to Entrepreneurship," CESifo Working Paper Series 2053, CESifo Group Munich.
    2. repec:eee:corfin:v:44:y:2017:i:c:p:289-307 is not listed on IDEAS
    3. Puri, Manju & Robinson, David T., 2007. "Optimism and economic choice," Journal of Financial Economics, Elsevier, vol. 86(1), pages 71-99, October.
    4. Enrico Santarelli & Marco Vivarelli, 2007. "Entrepreneurship and the process of firms’ entry, survival and growth," Industrial and Corporate Change, Oxford University Press, vol. 16(3), pages 455-488, June.
    5. Karel Janda, 2006. "Lender and Borrower as Principal and Agent," Working Papers IES 2006/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2006.
    6. Hyytinen, Ari & Pajarinen, Mika, 2005. "Why Are All New Entrepreneurs Better Than Average? Evidence from Subjective Failure Rate Expectations," Discussion Papers 987, The Research Institute of the Finnish Economy.
    7. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "The Start-Up and Growth Stages in Enterprise Formation: The “New View” of Dividend Taxation Reconsidered," CESifo Working Paper Series 1476, CESifo Group Munich.
    8. Linda Bergset, 2015. "The Rationality and Irrationality of Financing Green Start-Ups," Administrative Sciences, MDPI, Open Access Journal, vol. 5(4), pages 1-26, November.
    9. Vesa Kanniainen & Seppo Kari & Jouko Ylä-Liedenpohja, 2007. "Nordic dual income taxation of entrepreneurs," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(4), pages 407-426, August.
    10. Marco Vivarelli, 2013. "Is entrepreneurship necessarily good? Microeconomic evidence from developed and developing countries," Industrial and Corporate Change, Oxford University Press, vol. 22(6), pages 1453-1495, December.
    11. Naude, Wim, 2008. "Entrepreneurship in Economic Development," WIDER Working Paper Series 020, World Institute for Development Economic Research (UNU-WIDER).
    12. Stefanescu, Răzvan & Dumitriu, Ramona, 2016. "Planificarea financiarǎ pentru decizii asupra antreprenoriatului - Partea întâi
      [Financial planning for decisions on entrepreneurship, Part I]
      ," MPRA Paper 74829, University Library of Munich, Germany, revised 30 Oct 2016.
    13. Parker, Simon C., 2013. "Do serial entrepreneurs run successively better-performing businesses?," Journal of Business Venturing, Elsevier, vol. 28(5), pages 652-666.
    14. Stephen Weymouth & J. Lawrence Broz, 2013. "Government Partisanship and Property Rights: Cross-Country Firm-Level Evidence," Economics and Politics, Wiley Blackwell, vol. 25(2), pages 229-256, July.

    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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