This paper suggests a solution to what has become known as the quot;private equity premium puzzlequot; (Moskowitz and Vissing-Jorgensen (2002)). We interpret occupational choice as a dynamic portfolio choice problem of a life-cycle investor facing a liquidity constraint and imperfect information...

On the one hand, recently a number of theoretical models have highlighted the role of credit market frictions in propagating and amplifying macroeconomic shocks. On the other hand, it still seems an open question whether this role is quantitatively significant. Our paper tries to fill this gap....