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On Entrepreneurial Risk–Taking and the Macroeconomic Effects of Financial Constraints

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  • Christiane Clemens

    () (University of Hamburg)

  • Maik Heinemann

    () (Institute of Economics, University of Lüneburg)

Abstract

This paper deals with credit market imperfections and idiosyncratic risks in a two–sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk–taking, and social mobility. Contrary to many models in the literature, our comparative static results cover a broad range for borrowing constraints, from an unrestrained to a perfectly constrained economy. In our baseline model, we find substantial gains in output, welfare, and wealth equality associated with credit market improvements. The marginal gains from relaxing constraints are largest for empirically relevant debt–equity ratios. Interestingly, the entrepreneurship rate and social mobility respond non–monotonically to a change in the tightness of financial constraints. The results crucially depend on the degree of income persistence and feedback effects in general equilibrium, where optimal firm sizes and the demand for credit are determined endogenously.

Suggested Citation

  • Christiane Clemens & Maik Heinemann, 2008. "On Entrepreneurial Risk–Taking and the Macroeconomic Effects of Financial Constraints," Working Paper Series in Economics 103, University of Lüneburg, Institute of Economics.
  • Handle: RePEc:lue:wpaper:103
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    References listed on IDEAS

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    Cited by:

    1. Maik Heinemann & Alexander Wulff, 2015. "Idiosyncratic Risk, Borrowing Constraints and Financial Integration - A Discussion of Ambiguous Results," Working Papers 2015019, Berlin Doctoral Program in Economics and Management Science (BDPEMS).
    2. Wulff, Alexander & Heinemann, Maik, 2015. "Idiosyncratic Risk, Borrowing Constraints and Financial Integration - A Discussion of Ambiguous Results," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113165, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    CGE; occupational choice; financial constraints; wealth distribution;

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D3 - Microeconomics - - Distribution
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G0 - Financial Economics - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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