Entrepreneurs, Risk Aversion and Dynamic Firms
This paper conducts a theoretical and quantitative analysis of how entrepreneurs choose firm size, capital structure, default, and owner consumption to manage firm risk, including how these choices change with risk aversion. We decompose an entrepreneur’s default decision into three elements: the fraction of firm debt; the potential reduction in personal consumption from losing the firm; and the ratio of personal wealth to firm scale, which determines an entrepreneur’s ability to inject personal funds to continue operation. Data from the Survey of Small Business Finances is used to calibrate the model and estimate entrepreneur risk aversion. We determine the evolution of entrepreneur net worth, consumption, and firm assets over time. We find that many entrepreneurs have lower net worth and consumption than non-entrepreneurs with the same preferences, but the densities of the distributions of consumption and net-worth have wide upper tails. Thus, entrepreneurship can be a path toward great wealth and high consumption for the top quantiles of entrepreneurs.
|Date of creation:||2013|
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- Hugo A. Hopenhayn & Galina Vereshchagina, 2003.
"Risk Taking by Entrepreneurs,"
RCER Working Papers
500, University of Rochester - Center for Economic Research (RCER).
- Boissay, Frédéric & Gropp, Reint, 2007.
"Trade credit defaults and liquidity provision by firms,"
Working Paper Series
0753, European Central Bank.
- Frederic Boissay & Reint Gropp, 2007. "Trade Credit Defaults and Liquidity Provision by Firms," Working Paper Series: Finance and Accounting 179, Department of Finance, Goethe University Frankfurt am Main.
- Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer, vol. 36(2), pages 239-266, August.
- Jacob M. Short & Andy Glover, 2011. "Bankruptcy, Incorporation and the Nature of Entrepreneurial Risk," 2011 Meeting Papers 836, Society for Economic Dynamics.
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