Entrepreneurial risk choice and credit market equilibria
We analyze under what condiitons credit markets are efficient in providing loans to entrepreneurs who can start a new project after previous failure. An entrepreneur of uncertain talent chooses the riskiness of her project. If banks cannot perfectly observe the risk of previous projects, two equilibria may coexist: (1) an inefficient equilibrium in which the entrepreneur undertakes a low-risk project and has no access to finance after failure; and (2) a more efficient equilibrium in which the entrepreneur undertakes high-risk projects and gets financed even after an endogenously determined number of failures.
Year of publication: |
2010
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Authors: | Schumacher, Heiner ; Kowalik, Michal ; Gerling, Kerstin |
Institutions: | Federal Reserve Bank of Kansas City |
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