Credit Crunches and Credit Allocation in a Model of Entrepreneurship
We study the effects of credit shocks in a model with heterogeneous entrepreneurs, financing constraints, and a realistic firm size distribution. As entrepreneurial firms can grow only slowly and rely heavily on retained earnings to expand the size of their business in this set-up, we show that, by reducing entrepreneurial firm size and earnings, negative shocks have a very persistent effect on real activity. In determining the speed of recovery from an adverse economic shock, the most important factor is the extent to which the shock erodes entrepreneurial wealth.
We are grateful to Matthias Doepke, Igor Livshits, Guido Lorenzoni, Nikolai Roussanov, and many seminars participants for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, the Federal Reserve Bank of Chicago, the Board of Governors, or the Federal Reserve System.
Marco Bassetto & Marco Cagetti & Mariacristina De Nardi, . "Credit Crunches and Credit Allocation in a Model of Entrepreneurship," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics. citation courtesy of