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Credit crunches and credit allocation in a model of entrepreneurship

  • Marco Bassetto
  • Marco Cagetti
  • Mariacristina De Nardi

We study the effects of credit shocks in a model with heterogeneous entrepreneurs, financing constraints, and a realistic firm size distribution. As entrepreneurial firms can grow only slowly and rely heavily on retained earnings to expand the size of their business in this set-up, we show that, by reducing entrepreneurial firm size and earnings, negative shocks have a very persistent effect on real activity. In determining the speed of recovery from an adverse economic shock, the most important factor is the extent to which the shock erodes entrepreneurial wealth.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2013-06.

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Date of creation: 2013
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Handle: RePEc:fip:fedhwp:wp-2013-06
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