Working Paper
Entrepreneurial risk choice and credit market equilibria
Abstract: We analyze under what condiitons 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.
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Bibliographic Information
Provider: Federal Reserve Bank of Kansas City
Part of Series: Research Working Paper
Publication Date: 2010
Number: RWP 10-13