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The Borrower's Curse: Optimism, Finance and Enterpreneurship


  • De Meza, D.
  • Southey, C.


This paper argues that most of the facts charaterising small-scale businesses, including high failure rates, reliance on bank credit rather than equity finance, relatively low interest rate margins, and credit rationing, can be explained by a tendancy for those who are excessively optimistic to dominate new entrants. Drawing on findings in psycology, we model entrants as relatively naive optimisers. Banks on the other hand are viewed as well informed and efficient processors of information.

Suggested Citation

  • De Meza, D. & Southey, C., 1995. "The Borrower's Curse: Optimism, Finance and Enterpreneurship," Discussion Papers 9502, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:9502

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    References listed on IDEAS

    1. Backus, David K & Gregory, Allan W, 1993. "Theoretical Relations between Risk Premiums and Conditional Variances," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 177-185, April.
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    8. Toyoda, Toshihisa & Ohtani, Kazuhiro, 1986. "Testing equality between sets of coefficients after a preliminary test for equality of disturbance variances in two linear regressions," Journal of Econometrics, Elsevier, vol. 31(1), pages 67-80, February.
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    10. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


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