Journal article
Entrepreneurs, legal institutions and firm dynamics
Economic theory, Vol.63(1), pp.263-285
01/2017
DOI: 10.1007/s00199-016-1026-8
Abstract
This paper assesses the impact of legal institutions on firm dynamics in a model where entrepreneurs have heterogeneous risk aversion, credit constraints and may default. Entrepreneurs choose firm size, capital structure, consumption, default and whether to incorporate. We find that less risk-averse entrepreneurs tend to incorporate while more risk-averse entrepreneurs do not; this occurs because leaving some personal assets exposed by not incorporating allows more risk-averse borrowers to credibly commit to lower default rates. We show that incorporation is determined by two effects: the standard effect that bankruptcy insures low firm returns and a new “scale effect”—more risk-averse entrepreneurs run smaller firms and default more often. The more risk-averse choose to leave some personal assets unshielded in bankruptcy due to a commitment problem that dominates the value of insurance. The less risk-averse run larger firms, default less and incorporate.
Details
- Title: Subtitle
- Entrepreneurs, legal institutions and firm dynamics
- Creators
- Neus Herranz - University of Illinois Urbana IL USAStefan Krasa - University of Illinois Urbana IL USAAnne Villamil - University of Iowa Iowa City IA USA
- Resource Type
- Journal article
- Publication Details
- Economic theory, Vol.63(1), pp.263-285
- Publisher
- Springer Berlin Heidelberg
- DOI
- 10.1007/s00199-016-1026-8
- ISSN
- 0938-2259
- eISSN
- 1432-0479
- Grant note
- SES 050001 / NCSA 20061258 / Ewing Marion Kauffman Foundation (http://dx.doi.org/10.13039/100000868) SES 031839 / National Youth Science Foundation (http://dx.doi.org/10.13039/100007515)
- Language
- English
- Date published
- 01/2017
- Academic Unit
- Economics
- Record Identifier
- 9984083837602771
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