Buyout Fund and Entrepreneurial Spawning in an Endogenous Growth Model

This paper develops an endogenous growth model featuring income-dependent risk preferences to explain the emergence and evolution of buyout funds. We propose a novel preference structure where high-income agents derive utility from the thrill of entrepreneurial risk-taking, leading them to acquire business ideas from capital-constrained innovators. The model demonstrates that buyout funds emerge as equilibrium contracts when income inequality exceeds a critical threshold, with wealthy investors paying premiums to participate in ventures. Conversely, in more equal economies, buyout funds serve as transitional institutions. Initial inequality enables the acquisition of ideas, but subsequent growth allows the original idea holders to become independent entrepreneurs, leading to the fund's eventual decline. Our framework provides microfoundations for understanding how income distribution shapes financial intermediation patterns and their growth consequences, offering new insights into the relationship between inequality, entrepreneurial spawning, and innovation-driven growth.