Credit and Self-Employment

FRB Richmond Working Paper No. 09-5

41 Pages Posted: 12 Dec 2012

See all articles by Ahmet Akyol

Ahmet Akyol

York University

Kartik Athreya

Federal Reserve Banks - Federal Reserve Bank of Richmond

Date Written: April 8, 2009

Abstract

Limited personal liability for debts has long been justified as a tool to promote entrepreneurial risk taking by providing insurance to the borrower in the event of low returns. Nonetheless, such limits erode repayment incentives, and so may increase unsecured borrowing costs. Our paper is the first to evaluate the tradeoff between credit costs and insurance against failure. We build a life-cycle model with risky, and repeated, occupational choice in the presence of defaultable debt contracts. We find that limits to liability can encourage self-employment, and alter the timing, size, and financing of self-employment projects. We also find that the positive relationship between wealth and self-employment rates may not be evidence for credit constraints: We show that such a relationship is present even when limited liability is eliminated.

Keywords: self-employment, bankruptcy

JEL Classification: J23, E21, D31

Suggested Citation

Akyol, Ahmet and Athreya, Kartik, Credit and Self-Employment (April 8, 2009). FRB Richmond Working Paper No. 09-5, Available at SSRN: https://ssrn.com/abstract=2188508 or http://dx.doi.org/10.2139/ssrn.2188508

Ahmet Akyol

York University ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Kartik Athreya (Contact Author)

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

P.O. Box 27622
Richmond, VA 23261
United States

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