A Unified Model of Entrepreneurship Dynamics
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Authors
Wang, Chong
Wang, Neng
Yang, Jinqiang
Subjects
Advisors
Date of Issue
2012-04-24
Date
Publisher
Social Science Research Network
Language
Abstract
We develop an incomplete-markets q-theoretic model to study entrepreneurship dynamics. Precautionary motive, borrowing constraints, and capital illiquidity lead to underinvestment, conservative debt use, under-consumption, and less risky portfolio allocation. The endogenous liquid wealth-illiquid capital ratio w measures time-varying financial constraint. The option to accumulate wealth before entry is critical for entrepreneurship. Flexible exit option is important for risk management purposes. Investment increases and the private marginal value of liquidity decreases as w decreases and exit becomes more likely, contrary to predictions of standard financial constraint models. We show that the idiosyncratic risk premium is quantitatively significant, especially for low w.
Type
Working Paper
Description
The article of record as published may be located at http://dx.doi.org/10.2139/ssrn.2155743
Series/Report No
Department
Graduate School of Business & Public Policy (GSBPP)