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

See all articles by Kerstin Gerling

Kerstin Gerling

International Monetary Fund (IMF)

Michal K. Kowalik

Federal Reserve Banks - Federal Reserve Bank of Boston

Heiner Schumacher

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: November 5, 2010

Abstract

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

Gerling, Kerstin and Kowalik, Michal K. and Schumacher, Heiner, Entrepreneurial Risk Choice and Credit Market Equilibria (November 5, 2010). Federal Reserve Bank of Kansas City Research Paper Series No. 10-13. Available at SSRN: https://ssrn.com/abstract=1703683 or http://dx.doi.org/10.2139/ssrn.1703683

Kerstin Gerling (Contact Author)

International Monetary Fund (IMF) ( email )

Michal K. Kowalik

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Heiner Schumacher

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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