Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship

Posted: 7 Feb 2006

See all articles by Anna L. Paulson

Anna L. Paulson

Federal Reserve Bank of Chicago

Robert M. Townsend

MIT - Department of Economics

Alexander Karaivanov

Simon Fraser University (SFU) - Department of Economics

Abstract

We present and estimate a model in which the choice between entrepreneurship and wage work may be influenced by financial market imperfections. The model allows for limited liability, moral hazard, and a combination of both constraints. The paper uses structural techniques to estimate the model and identify the source of financial market imperfections using data from rural and semi-urban households in Thailand. Structural, nonparametric, and reduced-form estimates provide independent evidence that the dominant source of credit market imperfections is moral hazard. We reject the hypothesis that limited liability alone can explain the data.

Suggested Citation

Paulson, Anna L. and Townsend, Robert M. and Karaivanov, Alexander, Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship. Journal of Political Economy, Vol. 114, pp. 100-144, February 2006. Available at SSRN: https://ssrn.com/abstract=881046

Anna L. Paulson

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312 322 2169 (Phone)

Robert M. Townsend (Contact Author)

MIT - Department of Economics ( email )

Bldg. E52-252c
50 Memorial Drive
Cambridge, MA 02142
United States
617-452-3722 (Phone)
617-253-1330 (Fax)

Alexander Karaivanov

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

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