Entrepreneurial Risk Choice and Credit Market Equilibria
Federal Reserve Bank of Kansas City Research Paper Series No. 10-13
22 Pages Posted: 7 Nov 2010
Date Written: November 5, 2010
We analyze under what conditions 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.
Keywords: Stigma of Failure, Entrepreneurship, Credit Markets
JEL Classification: C73, G21, M13
Suggested Citation: Suggested Citation