NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Unified Model of Entrepreneurship Dynamics

Chong Wang, Neng Wang, Jinqiang Yang

NBER Working Paper No. 16843
Issued in March 2011
NBER Program(s):   AP   CF   EFG

We develop an incomplete-markets q-theoretic model to study entrepreneurship dynamics. Precautionary motive, borrowing constraints, and capital illiquidity lead to underinvestment, conservative debt use, under-consumption, and less risky portfolio allocation. The endogenous liquid wealth-illiquid capital ratio w measures time-varying financial constraint. The option to accumulate wealth before entry is critical for entrepreneurship. Flexible exit option is important for risk management purposes. Investment increases and the private marginal value of liquidity decreases as w decreases and exit becomes more likely, contrary to predictions of standard financial constraint models. We show that the idiosyncratic risk premium is quantitatively significant, especially for low w.

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This paper was revised on August 5, 2016

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Document Object Identifier (DOI): 10.3386/w16843

Published: as "A unified model of entrepreneurship dynamics" in Journal of Financial Economics Volume 106, Issue 1, October 2012, Pages 1–23 citation courtesy of

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