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Entrepreneurs, Legal Institutions and Firm Dynamics

Author

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  • Neus Herranz
  • Stefan Krasa
  • Anne P. Villamil

Abstract

This paper assesses quantitatively the impact of legal institutions on entrepreneurial firm dynamics. Owners choose firm size, financial structure and default to manage risk. We find: (i) Less risk averse entrepreneurs run bigger firms and it is optimal for them to incorporate, while more risk averse entrepreneurs run smaller firms and generally are better off remaining unincorporated. (ii) More risk-averse owners tend to default more often than the less risk averse, though they carry less debt. (iii) The model estimates a credit constraint, which binds for many but not all entrepreneurs and matches bank lending criteria. The model also finds modest differences in owner risk aversion, consistent with micro studies.

Suggested Citation

  • Neus Herranz & Stefan Krasa & Anne P. Villamil, 2009. "Entrepreneurs, Legal Institutions and Firm Dynamics," Centre for Growth and Business Cycle Research Discussion Paper Series 128, Economics, The Univeristy of Manchester.
  • Handle: RePEc:man:cgbcrp:128
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    File URL: http://hummedia.manchester.ac.uk/schools/soss/cgbcr/discussionpapers/dpcgbcr128.pdf
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    References listed on IDEAS

    as
    1. Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 239-266, August.
    2. Glenn W Harrison & John A List & Charles Towe, 2007. "Naturally Occurring Preferences and Exogenous Laboratory Experiments: A Case Study of Risk Aversion," Econometrica, Econometric Society, vol. 75(2), pages 433-458, March.
    3. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "The effect of financial repression and enforcement on entrepreneurship and economic development," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 278-297, March.
    4. Galina Vereshchagina & Hugo A. Hopenhayn, 2009. "Risk Taking by Entrepreneurs," American Economic Review, American Economic Association, vol. 99(5), pages 1808-1830, December.
    5. Gropp, Reint & Boissay, Frédéric, 2007. "Trade credit defaults and liquidity provision by firms," Working Paper Series 753, European Central Bank.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Andrew Glover, 2010. "Bankruptcy, Incorporation, and the Nature of Entrepreneurial Risk," 2010 Meeting Papers 1010, Society for Economic Dynamics.

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