Entrepreneurial Risk, Investment and Innovation
60 Pages Posted: 25 Jul 2007
Date Written: December 2006
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.
Keywords: Entrepreneurs, Entrepreneurship, Innovation, Idiosyncratic Risk, Uncertainty, Incomplete Markets
JEL Classification: M13, O31, D80
Suggested Citation: Suggested Citation