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Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship

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  • Anna L. Paulson
  • Robert M. Townsend
  • Alexander Karaivanov

Abstract

We present and estimate a model in which the choice between entrepreneurship and wage work may be influenced by financial market imperfections. The model allows for limited liability, moral hazard, and a combination of both constraints. The paper uses structural techniques to estimate the model and identify the source of financial market imperfections using data from rural and semiurban households in Thailand. Structural, nonparametric, and reduced-form estimates provide independent evidence that the dominant source of credit market imperfections is moral hazard. We reject the hypothesis that limited liability alone can explain the data.

Suggested Citation

  • Anna L. Paulson & Robert M. Townsend & Alexander Karaivanov, 2006. "Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 100-144, February.
    • Handle: RePEc:ucp:jpolec:v:114:y:2006:i:1:p:100-144
    DOI: 10.1086/498917
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    References listed on IDEAS

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