Credit crunches and credit allocation in a model of entrepreneurship

Marco Bassetto; Marco Cagetti; Mariacristina De Nardi

doi:10.1016/j.red.2014.08.003

Credit crunches and credit allocation in a model of entrepreneurship

Marco Bassetto, Marco Cagetti, Mariacristina De Nardi

Research output: Contribution to journal › Article › peer-review

29 Scopus citations

Abstract

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, 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.

Original language	English (US)
Pages (from-to)	53-76
Number of pages	24
Journal	Review of Economic Dynamics
Volume	18
Issue number	1
DOIs	https://doi.org/10.1016/j.red.2014.08.003
State	Published - Jan 1 2015
Externally published	Yes

Bibliographical note

Funding Information:
We are grateful to the editors, an anonymous referee, Matthias Doepke, Igor Livshits, Guido Lorenzoni, Nikolai Roussanov, Ali Shourideh, 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 Federal Reserve Bank of Chicago, the Board of Governors, or the Federal Reserve System. Marco Bassetto and Mariacristina De Nardi acknowledge financial support from the ESRC Grant # ES/L500343/1 through the Centre for Macroeconomics.

Publisher Copyright:
© 2014 The Authors.

Keywords

Borrowing constraints
Credit allocation
Credit crunches
D58
E21
E22
E32
E44
E62
Entrepreneurship
Wealth inequality

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10.1016/j.red.2014.08.003

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title = "Credit crunches and credit allocation in a model of entrepreneurship",

abstract = "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, 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.",

keywords = "Borrowing constraints, Credit allocation, Credit crunches, D58, E21, E22, E32, E44, E62, Entrepreneurship, Wealth inequality",

author = "Marco Bassetto and Marco Cagetti and {De Nardi}, Mariacristina",

note = "Funding Information: We are grateful to the editors, an anonymous referee, Matthias Doepke, Igor Livshits, Guido Lorenzoni, Nikolai Roussanov, Ali Shourideh, 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 Federal Reserve Bank of Chicago, the Board of Governors, or the Federal Reserve System. Marco Bassetto and Mariacristina De Nardi acknowledge financial support from the ESRC Grant # ES/L500343/1 through the Centre for Macroeconomics. Publisher Copyright: {\textcopyright} 2014 The Authors.",

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AU - Bassetto, Marco

AU - Cagetti, Marco

AU - De Nardi, Mariacristina

N1 - Funding Information: We are grateful to the editors, an anonymous referee, Matthias Doepke, Igor Livshits, Guido Lorenzoni, Nikolai Roussanov, Ali Shourideh, 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 Federal Reserve Bank of Chicago, the Board of Governors, or the Federal Reserve System. Marco Bassetto and Mariacristina De Nardi acknowledge financial support from the ESRC Grant # ES/L500343/1 through the Centre for Macroeconomics. Publisher Copyright: © 2014 The Authors.

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N2 - 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, 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.

AB - 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, 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.

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KW - Credit allocation

KW - Credit crunches

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KW - E21

KW - E22

KW - E32

KW - E44

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KW - Entrepreneurship

KW - Wealth inequality

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Credit crunches and credit allocation in a model of entrepreneurship

Abstract

Bibliographical note

Keywords

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