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|
|Date of revision:|
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- Arellano, Cristina, 2008.
"Default risk and income fluctuations in emerging economies,"
7867, University Library of Munich, Germany.
- Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
- Galina Vereshchagina & Hugo A. Hopenhayn, 2009.
"Risk Taking by Entrepreneurs,"
American Economic Review,
American Economic Association, vol. 99(5), pages 1808-30, December.
- 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.
- 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.
- Boissay, Frédéric & Gropp, Reint, 2007. "Trade credit defaults and liquidity provision by firms," Working Paper Series 0753, European Central Bank.
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