Empirical evidence suggests that capital-market constraints prevent low-wealth individuals from setting up in business. This paper shows this finding to be consistent with socially excessive lending and an interest-rate tax being welfare-improving. One feature of the model, banks' inability to...

This paper investigates the implications of adverse selection for capital market equilibrium when borrowers are risk averse. K. J. Arrow and R. C. Lind (1970) argue that when capital markets fail to spread risk properly interest rates are too high. The market adds a risk premium that the social...

A mass of evidence suggests that aspiring entrepreneurs with low net worth or from disadvantaged social groups are excluded from capital markets. Asymmetric information potentially explains these findings, though whether aggregate lending is raised or lowered relative to the full information...

This paper argues that, contrary to the views of most development economists, policies that raise the cost of labor relative to capital are in the collective and individual interest of LDCs. The reason is that low wages mean that the attractiveness of an LDC production location is positively...

This paper argues that most of the facts characterizing small-scale businesses, including high failure rates, reliance on bank credit rather than equity finance, relatively low interest rate margins, and credit rationing, can be explained by a tendency for those who are excessively optimistic to...

This paper investigates the extent to which the supply of collateral affects business formation in the United Kingdom. Bank loans are typically secured on the entrepreneur's house. Using a variety of data and formulations, evidence is found that a 10 percent rise in the value of unreleased net...

This paper endogenizes the internal organization of competitive firms in a simple general equilibrium framework. The options are monitored teams, unmonitored teams motivated by collective performance pay, and self-employment. The choice of incentive scheme depends on market price and also...