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Wealth Distribution, Moral Hazard, and Entrepreneurship

Author

Listed:
  • Sanjay Banerji
  • Ngo Van Long

Abstract

This paper examines the endogenous determination of the choice between an entrepreneur and a pure lender. The model relies on three key factors: risk aversion, wealth distribution, and moral hazard. We show that, under certain assumptions, only agents in the middle range of the wealth distribution choose to be entrepreneurs, while very wealthy agents (i.e., those at the high end of the wealth distribution) and agents at the low end of the wealth distribution find it optimal to be lenders, and avoid being entrepreneurs. Only entrepreneurs invest in risky projects, and they borrow topartially finance their investments. Thus, two countries with the same population size and the same per capita wealth may behave differently from each other, even when individuals have identical preferences (i.e., identical utility functions), because of the difference in the distribution of wealth. We also demonstrate how changes in the wealth distribution (while keeping the mean level of wealth constant) within a given country can lead to a switch in its international net indebtness position: a debtor country can become a creditor country. On étudie la détermination endogène du choix de devenir entrepreneur. Les éléments importants du modèle sont le risque moral, l'aversion au risque, et la distribution des richesses. On démontre que, sous certaines hypothèses, seuls deviennent entrepreneurs les individus qui ne sont ni puissamment riches, ni pauvres. Ils investissent dans des projets aux rendements incertains, en empruntant de l'argent auprès de gens plus pauvres ou plus riches qu'eux-mêmes. Le taux d'intérêt en équilibre dépend de la fonction de distribution des richesses. Par conséquent, les pays ayant le même niveau de richesse moyenne peuvent être très différents les uns des autres.

Suggested Citation

  • Sanjay Banerji & Ngo Van Long, 2000. "Wealth Distribution, Moral Hazard, and Entrepreneurship," CIRANO Working Papers 2000s-01, CIRANO.
    • Handle: RePEc:cir:cirwor:2000s-01
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    References listed on IDEAS

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    1. Marcel Dagenais & Claude Montmarquette & Daniel Parent & Nathalie Viennot-Briot, 1999. "Travail pendant les études, performance scolaire et abandon," CIRANO Working Papers 99s-41, CIRANO.
    2. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(1), pages 35-52.
    3. de Meza, David & Webb, David, 1999. "Wealth, Enterprise and Credit Policy," Economic Journal, Royal Economic Society, vol. 109(455), pages 153-163, April.
    4. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    5. Gertler, Mark & Rogoff, Kenneth, 1990. "North-South lending and endogenous domestic capital market inefficiencies," Journal of Monetary Economics, Elsevier, vol. 26(2), pages 245-266, October.
    6. Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 151-172.
    7. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
    8. Marcel Boyer, 1999. "Les Expos, l'OSM, les universités, les hôpitaux : Le coût d'un déficit de 400 000 emplois au Québec = Expos, Montreal Symphony Orchestra, Universities, Hospitals: The Cost of a 400,000-Job Shortfall i," CIRANO Papers 99c-01, CIRANO.
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    Cited by:

    1. Richard Cornes & Ngo Van Long & Koji Shimomura, 2000. "Strategic Behavior under Intertemporal Production Externalities," CIRANO Working Papers 2000s-07, CIRANO.
    2. Ngo Van Long & Koji Shimomura, 2000. "Semi-Stationary Equilibrium in Leader-Follower Games," CIRANO Working Papers 2000s-08, CIRANO.
    3. Claudia Keser, 2000. "Cooperation in Public Goods Experiments (followed by a comment by Claude Montmarquette)," CIRANO Working Papers 2000s-04, CIRANO.

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    Keywords

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    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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