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Entrepreneurial risk choice and credit market equilibria

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  • Heiner Schumacher
  • Michal Kowalik
  • Kerstin Gerling

Abstract

We analyze under what condiitons credit markets are efficient in providing loans to entrepreneurs who can start a new project after previous failure. An entrepreneur of uncertain talent chooses the riskiness of her project. If banks cannot perfectly observe the risk of previous projects, two equilibria may coexist: (1) an inefficient equilibrium in which the entrepreneur undertakes a low-risk project and has no access to finance after failure; and (2) a more efficient equilibrium in which the entrepreneur undertakes high-risk projects and gets financed even after an endogenously determined number of failures.

Suggested Citation

  • Heiner Schumacher & Michal Kowalik & Kerstin Gerling, 2010. "Entrepreneurial risk choice and credit market equilibria," Research Working Paper RWP 10-13, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp10-13
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    1. Canidio, Andrea & Legros, Patrick, 2016. "The Value of Entrepreneurial Failures: Task Allocation and Career Concerns," CEPR Discussion Papers 11295, C.E.P.R. Discussion Papers.
    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. Dunn, Thomas & Holtz-Eakin, Douglas, 2000. "Financial Capital, Human Capital, and the Transition to Self-Employment: Evidence from Intergenerational Links," Journal of Labor Economics, University of Chicago Press, vol. 18(2), pages 282-305, April.
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