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Entrepreneurs, Risk Aversion, and Dynamic Firms

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  • Neus Herranz
  • Stefan Krasa
  • Anne P. Villamil

Abstract

How do entrepreneurs vary firm size, capital structure, and default to manage risk? We show that more risk-averse entrepreneurs run smaller, more highly leveraged firms and default less, because running a smaller firm with higher debt reduces personal funds at risk in the firm. Optimal default depends on ex ante debt, consumption forgone from firm liquidation, and owner capacity to inject funds. We show that entrepreneurs sacrifice current consumption in the hope of future success that never materializes for the bottom 25 percent, but entrepreneurship is a path toward great wealth and high consumption for the top quartile.

Suggested Citation

  • Neus Herranz & Stefan Krasa & Anne P. Villamil, 2015. "Entrepreneurs, Risk Aversion, and Dynamic Firms," Journal of Political Economy, University of Chicago Press, vol. 123(5), pages 1133-1176.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/682678
    DOI: 10.1086/682678
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