TY  - JOUR
AU  - Wang,Chong
AU  - Wang,Neng
AU  - Yang,Jinqiang
TI  - Dynamics of Entrepreneurship under Incomplete Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16843
PY  - 2011
Y2  - March 2011
UR  - http://www.nber.org/papers/w16843
L1  - http://www.nber.org/papers/w16843.pdf
N1  - Author contact info:
Chong Wang
Naval Postgraduate School
Graduate School of Business and Public Policy
1 University Circle
Monterey, CA 93943
E-Mail: cwang@nps.edu

Neng Wang
Columbia Business School
3022 Broadway, Uris Hall 812
New York, NY 10027
Tel: 212/854-3869
Fax: 212/662-8474
E-Mail: nw2128@columbia.edu

Jinqiang Yang
Shanghai University of Finance
and Economics
Guoding Rd. 777
Shanghai, 200433
China
E-Mail: huda518@gmail.com
AB  - An entrepreneur faces substantial non-diversifiable business risk and liquidity constraints, both of which we refer to as frictions. We show that these frictions have significant economic effects on business start-up, capital accumulation/asset sales, portfolio allocation,  consumption/saving, and business exit decisions. Compared with the complete-markets benchmark, these frictions make entrepreneurs  invest substantially less in the business, consume less, and allocate less to the market portfolio. The endogenous exit option provides flexibility for the entrepreneur to manage downside risk. The entrepreneur's optimal entry decision critically depends on the outside option, the start-up cost, risk aversion, and wealth. We show that the flexibility to build up financial wealth before entering into entrepreneurship is quite valuable. Finally, we provide an operational framework to calculate the private equity idiosyncratic risk premium for an entrepreneurial firm and show that this premium depends on entrepreneurial wealth, non-diversifiable risk exposure, and risk aversion.
ER  -