IDEAS home Printed from https://ideas.repec.org/a/ucp/jpolec/doi10.1086-682678.html
   My bibliography  Save this article

Entrepreneurs, Risk Aversion, and Dynamic Firms

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/682678
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: http://dx.doi.org/10.1086/682678
    Download Restriction: Access to the online full text or PDF requires a subscription.

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 239-266, August.
    2. Galina Vereshchagina & Hugo A. Hopenhayn, 2009. "Risk Taking by Entrepreneurs," American Economic Review, American Economic Association, vol. 99(5), pages 1808-1830, December.
    3. Anna L. Paulson & Robert M. Townsend & Alexander Karaivanov, 2006. "Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 100-144, February.
    4. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    5. Andrew Glover, 2010. "Bankruptcy, Incorporation, and the Nature of Entrepreneurial Risk," 2010 Meeting Papers 1010, Society for Economic Dynamics.
    6. Florin Bidian & Camelia Bejan, 2015. "Martingale properties of self-enforcing debt," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(1), pages 35-57, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shi, Jinchuan & Zhang, Xiaoqian, 2018. "How to explain corporate investment heterogeneity in China's new normal: Structural models with state-owned property rights," China Economic Review, Elsevier, vol. 50(C), pages 1-16.
    2. Duncan, Alfred J. M. & Nolan, Charles, 2019. "Disputes, debt and equity," Theoretical Economics, Econometric Society, vol. 14(3), September.
    3. Gaillard, Alexandre & Kankanamge, Sumudu, 2018. "Entrepreneurship, Labor Market Mobility and the Role of Entrepreneurial Insurance," TSE Working Papers 18-929, Toulouse School of Economics (TSE), revised Feb 2019.
    4. Duane Rockerbie & Stephen Easton, 2018. "Revenue Sharing in Major League Baseball: The Moments That Meant so Much," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 6(3), pages 1-16, August.
    5. Keller, Godfrey & Novák, Vladimír & Willems, Tim, 2019. "A note on optimal experimentation under risk aversion," Journal of Economic Theory, Elsevier, vol. 179(C), pages 476-487.
    6. Beck, Thorsten & Pamuk, Haki & Ramrattan, Ravindra & Uras, Burak R., 2018. "Payment instruments, finance and development," Journal of Development Economics, Elsevier, vol. 133(C), pages 162-186.
    7. Kankanamge, Sumudu & Gaillard, Alexandre, 2020. "Buying and Selling Entrepreneurial Assets," TSE Working Papers 20-1078, Toulouse School of Economics (TSE).
    8. Federico Esposito, 2016. "Risk Diversification and International Trade," 2016 Meeting Papers 302, Society for Economic Dynamics.
    9. Smith, Lisa & Rees, Patricia & Murray, Noel, 2016. "Turning entrepreneurs into intrapreneurs: Thomas Cook, a case-study," Tourism Management, Elsevier, vol. 56(C), pages 191-204.
    10. Chivers, David, 2017. "Success, survive or escape? Aspirations and poverty traps," Journal of Economic Behavior & Organization, Elsevier, vol. 143(C), pages 116-132.
    11. Mariacristina De Nardi & Giulio Fella, 2017. "Saving and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 280-300, October.
    12. Wai-Hong Ho, 2017. "Financial market globalization, nonconvergence and credit cycles," Annals of Finance, Springer, vol. 13(2), pages 153-180, May.
    13. James Cunningham & Alistair R. Anderson, 2018. "Inspired or Foolhardy: Sensemaking, Confidence and Entrepreneurs’ Decision-Making," Group Decision and Negotiation, Springer, vol. 27(3), pages 393-415, June.
    14. Carrillo, Paul & Emran, M. Shahe, 2018. "Loss Aversion, Transaction Costs, or Audit Trigger? Learning about Corporate Tax Compliance from a Policy Experiment with Withholding Regime," MPRA Paper 87445, University Library of Munich, Germany.
    15. Neus Herranz & Stefan Krasa & Anne P. Villamil, 2017. "Entrepreneurs, legal institutions and firm dynamics," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(1), pages 263-285, January.
    16. Joel M. Vanden, 2016. "Optimal capital structures for private firms," Annals of Finance, Springer, vol. 12(2), pages 245-273, May.
    17. David Chivers & Zhigang Feng & Anne Villamil, 2017. "Employment-based Health Insurance and Misallocation: Implications for the Macroeconomy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 125-149, January.
    18. Jim Y. Jin & Shinji Kobayashi, 2016. "Impact of risk aversion and countervailing tax in oligopoly," Annals of Finance, Springer, vol. 12(3), pages 393-408, December.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jpolec:doi:10.1086/682678. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division). General contact details of provider: https://www.journals.uchicago.edu/JPE .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.