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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Ludwig, Sandra / Schmitz, Hendrik

Ed. by Auriol, Emmanuelle / Barigozzi, Francesca / Brunner, Johann / Fleck, Robert / Mastrobuoni, Giovanni / Mendola, Mariapia / Requate, Till / de Vries, Frans / Wenzel, Tobias / Zulehner, Christine


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Volume 15, Issue 3

Issues

Volume 19 (2019)

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Entrepreneurial Risk Choice and Credit Market Equilibria

Heiner Schumacher
  • Corresponding author
  • Department of Economics and Business, Aarhus University, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
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/ Kerstin Gerling / Michal Kowalik
Published Online: 2015-04-10 | DOI: https://doi.org/10.1515/bejeap-2014-0160

Abstract

We analyze under what conditions competitive credit markets are efficient in providing loans to entrepreneurs who can start a new project after failure. An entrepreneur of uncertain talent chooses the riskiness of her project. If banks privately observe the entrepreneur’s risk choices, two equilibria coexist: (1) an inefficient equilibrium in which the entrepreneur realizes a low-risk project and has no access to finance after failure and (2) a more efficient equilibrium in which the entrepreneur first realizes high-risk projects and then, after continuous failures, a low-risk project. There is a non-monotonic relationship between bank information and potential credit market inefficiency. We discuss the implications for credit registers and entrepreneurial education.

Keywords: stigma of failure; entrepreneurship; credit markets; asymmetric information

JEL: C73; G21; M13

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About the article

Published Online: 2015-04-10

Published in Print: 2015-07-01


Citation Information: The B.E. Journal of Economic Analysis & Policy, Volume 15, Issue 3, Pages 1455–1480, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2014-0160.

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