Entrepreneurship, Frictions, and Wealth

60 Pages Posted: 31 Oct 2005

See all articles by Marco Cagetti

Marco Cagetti

University of Virginia; Federal Reserve Bank of Chicago

Mariacristina De Nardi

Federal Reserve Bank of Chicago; University College London, Economics Dpt.; National Bureau of Economic Research (NBER) - Public Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2005

Abstract

Although the role of financial constraints on entrepreneurial choices has received considerable attention, the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth concentration and, conversely, the distribution of wealth affects entrepreneurial choices in presence of borrowing constraints. We construct a model that matches wealth inequality very well, for both entrepreneurs and non-entrepreneurs. We find that more restrictive borrowing constraints generate less wealth concentration, but also reduce average firm size, aggregate capital, and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only, there would be fewer large firms, fewer entrepreneurs, and less aggregate capital, but also less wealth concentration.

Keywords: entrepreneurship, borrowing constraints, inequality, wealth

JEL Classification: E21, E60, H20, H32

Suggested Citation

Cagetti, Marco and Cagetti, Marco and De Nardi, Mariacristina and De Nardi, Mariacristina, Entrepreneurship, Frictions, and Wealth (August 17, 2005). FRB of Chicago Working Paper No. 2005-09, Available at SSRN: https://ssrn.com/abstract=838324 or http://dx.doi.org/10.2139/ssrn.838324

Marco Cagetti

University of Virginia ( email )

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Federal Reserve Bank of Chicago ( email )

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Mariacristina De Nardi (Contact Author)

University College London, Economics Dpt. ( email )

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Federal Reserve Bank of Chicago ( email )

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National Bureau of Economic Research (NBER) - Public Economics ( email )

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HOME PAGE: http://www.nber.org/~denardim

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