IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Entrepreneurial Choice and Knightian Uncertainty with Borrowing Constraints

  • Takanori Adachi

    ()

    (School of Economics, Nagoya University)

  • Takao Asano

    ()

    (Faculty of Economics, Okayama University)

This paper studies the effects of Knightian uncertainty, or ambiguity, on entrepreneurial choice. By distinguishing between risk and ambiguity, we first show that ambiguity aversion makes it less likely that an individual will become an entrepreneur. It is also shown that an increase in ambiguity unambiguously reduces the amount of investment. In the presence of borrowing constraints, the less ambiguity averse is the individual, the more likely is his or her investment to be constrained. More importantly, constrained wage workers, who would become entrepreneurs in the absence of credit market imperfection, emerge if and only if the market wage is high enough. These individuals are characterized by an intermediate degree of ambiguity aversion. When interpreting these constrained wage workers as managerial and professional workers, our model predicts the rise of such workers in the process of economic development.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.kier.kyoto-u.ac.jp/DP/DP803.pdf
Download Restriction: no

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 803.

as
in new window

Length:
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:kyo:wpaper:803
Contact details of provider: Postal: Yoshida-Honmachi, Sakyo-ku, Kyoto 606-8501
Phone: +81-75-753-7102
Fax: +81-75-753-7193
Web page: http://www.kier.kyoto-u.ac.jp/eng/index.html
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. H. Henry Cao & Tan Wang & Harold H. Zhang, 2005. "Model Uncertainty, Limited Market Participation, and Asset Prices," Review of Financial Studies, Society for Financial Studies, vol. 18(4), pages 1219-1251.
  2. Massimo Marinacci & Fabio Maccheroni & Aldo Rustichini & Marco Taboga, 2005. "Portfolio Selection with Monotone Mean-Variance Preferences," Finance 0502014, EconWPA.
  3. Jianjun Miao & Neng Wang, 2010. "Risk, uncertainty,and option exercise," Boston University - Department of Economics - Working Papers Series WP2010-029, Boston University - Department of Economics.
  4. Gilboa,Itzhak, 2009. "Theory of Decision under Uncertainty," Cambridge Books, Cambridge University Press, number 9780521517324.
  5. Jurgen Eichberger & David Kelsey & Burkhard C. Schipper, 2005. "Ambiguity and Social Interaction," Discussion Papers 0504, Exeter University, Department of Economics.
  6. Nobuyuki Harada & Kyoichi Kijima, 2005. "Consumption-Leisure Preference Structure: A New Explanation of the Evans-Jovanovic Results for Entrepreneurial Choice," Small Business Economics, Springer, vol. 24(4), pages 423-427, 05.
  7. Takao Asano, 2010. "Precautionary Principle and the Optimal Timing of Environmental Policy Under Ambiguity," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 47(2), pages 173-196, October.
  8. Nikolaj Malchow-Møller & James Markusen & Jan Skaksen, 2010. "Labour market institutions, learning and self-employment," Small Business Economics, Springer, vol. 35(1), pages 35-52, July.
  9. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
  10. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  11. Iyigun, Murat F & Owen, Ann L, 1999. " Entrepreneurs, Professionals, and Growth," Journal of Economic Growth, Springer, vol. 4(2), pages 213-32, June.
  12. Luca Rigotti & Matthew Ryan & Rhema Vaithianathan, 2001. "Entrepreneurial Innovation," GE, Growth, Math methods 0103002, EconWPA.
  13. Asano, Takao, 2006. "Portfolio inertia under ambiguity," Mathematical Social Sciences, Elsevier, vol. 52(3), pages 223-232, December.
  14. Douglas Holtz-Eakin & David Joulfaian & Harvey Rosen, 1993. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Working Papers 698, Princeton University, Department of Economics, Industrial Relations Section..
  15. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
  16. Jianjun Miao, 2004. "A Note on Consumption and Savings under Knightian Uncertainty," Annals of Economics and Finance, Society for AEF, vol. 5(2), pages 299-311, November.
  17. Wakker,Peter P., 2010. "Prospect Theory," Cambridge Books, Cambridge University Press, number 9780521748681.
  18. Diamantaras, Dimitrios & Gilles, Robert P., 2011. "Ambiguity, social opinion and the use of common property resources," Journal of Economic Behavior & Organization, Elsevier, vol. 80(1), pages 210-222.
  19. 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.
  20. Douglas Holtz-Eakin & David Joulfaian & Harvey Rosen, 1992. "Entrepreneurial Decisions and Liquidity Constraints," Working Papers 679, Princeton University, Department of Economics, Industrial Relations Section..
  21. Engle Warnick James C. & Escobal Javier & Laszlo Sonia C., 2011. "Ambiguity Aversion and Portfolio Choice in Small-Scale Peruvian Farming," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-56, November.
  22. Takao Asano & Hiroko Okudaira & Masaru Sasaki, 2011. "An Experimental Test of a Search Model under Knightian Uncertainty," Discussion Papers in Economics and Business 11-05, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  23. Katsuya Takii, 2000. "Prediction Ability," Econometric Society World Congress 2000 Contributed Papers 1411, Econometric Society.
  24. David Ahn & Syngjoo Choi & Douglas Gale & Shachar Kariv, 2014. "Estimating ambiguity aversion in a portfolio choice experiment," Quantitative Economics, Econometric Society, vol. 5, pages 195-223, 07.
  25. Larry G. Epstein & JianJun Miao, 2001. "A Two-Person Dynamic Equilibrium under Ambiguity," RCER Working Papers 478, University of Rochester - Center for Economic Research (RCER).
  26. Francisco Buera, 2009. "A dynamic model of entrepreneurship with borrowing constraints: theory and evidence," Annals of Finance, Springer, vol. 5(3), pages 443-464, June.
  27. Nobuyuki Harada & Kyoichi Kijima, 2005. "Consumption-Leisure Preference Structure: A New Explanation of the Evans-Jovanovic Results for Entrepreneurial Choice," Small Business Economics, Springer, vol. 24(2), pages 187-191, 03.
  28. Asano, Takao, 2010. "Optimal tax policy and foreign direct investment under ambiguity," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 185-200, March.
  29. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  30. Ghirardato, Paolo & Marinacci, Massimo, 2002. "Ambiguity Made Precise: A Comparative Foundation," Journal of Economic Theory, Elsevier, vol. 102(2), pages 251-289, February.
  31. Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2007. "Irreversible investment and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 136(1), pages 668-694, September.
  32. David Kelsey & Willy Spanjers, 2004. "Ambiguity in Partnerships," Economic Journal, Royal Economic Society, vol. 114(497), pages 528-546, 07.
  33. Thomas Dunn & Douglas Holtz-Eakin, 1996. "Financial Capital, Human Capital, and the Transition to Self-Employment:Evidence from Intergenerational Links," NBER Working Papers 5622, National Bureau of Economic Research, Inc.
  34. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
  35. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
  36. Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2004. "Search and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 119(2), pages 299-333, December.
  37. Schultz, Theodore W, 1980. " Investment in Entrepreneurial Ability," Scandinavian Journal of Economics, Wiley Blackwell, vol. 82(4), pages 437-48.
  38. van Praag, C M & Cramer, J S, 2001. "The Roots of Entrepreneurship and Labour Demand: Individual Ability and Low Risk Aversion," Economica, London School of Economics and Political Science, vol. 68(269), pages 45-62, February.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:kyo:wpaper:803. 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: (Ryo Okui)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.