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Entrepreneurial risk aversion, net worth effects and real fluctuations

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  • Pardo, Cristian

Abstract

This paper examines the combined effect of asymmetric information and private entrepreneurial risk aversion on investment decisions. The standard optimal debt contract becomes modified by the introduction of insurance and a risk premium that entrepreneurs demand due to the uncertainty of their investment returns: the private equity premium. In general equilibrium, the private equity premium may become a mechanism that magnifies the effects of shocks. A structural estimation of the model's parameters using Chilean and U.S. data shows that the entrepreneurial risk aversion assumption has more empirical relevance in an economy where smaller privately-held businesses are relatively more prevalent than where the corporate sector predominates, like the U.S.

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  • Pardo, Cristian, 2013. "Entrepreneurial risk aversion, net worth effects and real fluctuations," Review of Financial Economics, Elsevier, vol. 22(4), pages 158-168.
    • Handle: RePEc:eee:revfin:v:22:y:2013:i:4:p:158-168
    DOI: 10.1016/j.rfe.2013.05.007
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    1. Mostafa EKHTIARI & Ehsan YADEGARI & Ghazale SADIDI, 2016. "Ranking Enterpreneurship Main Risks In Non-Profit Financial Funds By Todim Technique Under Grey Conditions (A Case Study In Iran)," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 50(3), pages 319-336.

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    More about this item

    Keywords

    Entrepreneurial risk aversion; Asymmetric and private information; Contracts; Business cycles;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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