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Entrepreneurial risk, investment and innovation

In this paper I develop a general equilibrium model with risk averse entrepreneurial firms and with public firms. The model predicts that an increase in uncertainty reduces the propensity of entrepreneurial firms to innovate, while it does not affect the propensity of public firms to innovate. Furthermore, it predicts that the negative effect of uncertainty on innovation is stronger for the less diversified entrepreneurial firms, and is stronger in the absence of financing frictions in the economy. In the second part of the paper I test these predictions on a dataset of small and medium Italian manufacturing firms.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1011.

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Date of creation: Dec 2006
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Handle: RePEc:upf:upfgen:1011
Contact details of provider: Web page: http://www.econ.upf.edu/

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  1. Rui Castro & Gian Luca Clementi & Glenn McDonald, 2007. "Legal Institutions, Sectoral Heterogeneity, and Economic Development," Working Paper Series 05-07, The Rimini Centre for Economic Analysis, revised Jul 2007.
  2. Junjian Miao & Neng Wang, 2005. "Investment, Consumption and Hedging under Incomplete Markets," Boston University - Department of Economics - Macroeconomics Working Papers Series WP2005-011, Boston University - Department of Economics, revised Sep 2006.
  3. Hui Chen & Jianjun Miao & Neng Wang, 2009. "Entrepreneurial Finance and Non-diversifiable Risk," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-180, Boston University - Department of Economics.
  4. Benfratello, Luigi & Schiantarelli, Fabio & Sembenelli, Alessandro, 2008. "Banks and innovation: Microeconometric evidence on Italian firms," Journal of Financial Economics, Elsevier, vol. 90(2), pages 197-217, November.
  5. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  6. Newey, Whitney K., 1987. "Efficient estimation of limited dependent variable models with endogenous explanatory variables," Journal of Econometrics, Elsevier, vol. 36(3), pages 231-250, November.
  7. Sarasvathy, D. K. & Simon, Herbert A. & Lave, Lester, 1998. "Perceiving and managing business risks: differences between entrepreneurs and bankers," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 207-225, January.
  8. Maria Laura Parisi & Fabio Schiantarelli & Alessandro Sembenelli, 2002. "Productivity, Innovation Creation and Absorption, and R&D: Micro Evidence for Italy," Boston College Working Papers in Economics 526, Boston College Department of Economics.
  9. Hall, Bronwyn H. & Mairesse, Jacques & Lotti, Francesca, 2006. "Employment, Innovation, and Productivity: Evidence from Italian Microdata," MERIT Working Papers 043, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  10. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
  11. George-Marios Angeletos & Laurent Calvet, 2003. "Idiosyncratic Production Risk, Growth, and the Business Cycle," NBER Working Papers 9764, National Bureau of Economic Research, Inc.
  12. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, 06.
  13. Francisco Covas, 2005. "Uninsured Idiosyncratic Production Risk With Borrowing Constraints," Computing in Economics and Finance 2005 198, Society for Computational Economics.
  14. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
  15. Dirk Czarnitzki & Kornelius Kraft, 2004. "Management Control and Innovative Activity," Review of Industrial Organization, Springer, vol. 24(1), pages 1-24, 02.
  16. Andrea Caggese & Vicente Cuñat, 2006. "Financing constraints and fixed-term employment contracts," Economics Working Papers 1010, Department of Economics and Business, Universitat Pompeu Fabra.
  17. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1131-1175, August.
  18. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06.
  19. Meh, Cesaire A. & Quadrini, Vincenzo, 2006. "Endogenous market incompleteness with investment risks," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2143-2165, November.
  20. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
  21. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
  22. Marianne P. Bitler & Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2005. "Testing Agency Theory with Entrepreneur Effort and Wealth," Journal of Finance, American Finance Association, vol. 60(2), pages 539-576, 04.
  23. Marco Cagetti & Mariacristina De Nardi, 2003. "Entrepreneurship, frictions, and wealth," Staff Report 322, Federal Reserve Bank of Minneapolis.
  24. George-Marios Angeletos, 2007. "Uninsured Idiosyncratic Investment Risk and Aggregate Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 1-30, January.
  25. Gentry William M. & Hubbard R. Glenn, 2004. "Entrepreneurship and Household Saving," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-57, August.
  26. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
  27. Rampini, Adriano A., 2004. "Entrepreneurial activity, risk, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 555-573, April.
  28. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-23, September.
  29. Herrera, Ana María & Minetti, Raoul, 2007. "Informed finance and technological change: Evidence from credit relationships," Journal of Financial Economics, Elsevier, vol. 83(1), pages 223-269, January.
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