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

32 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

Publisher Copyright:
© 2014 The Authors.

Keywords

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

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.red.2014.08.003

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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.",

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AU - Cagetti, Marco

AU - De Nardi, Mariacristina

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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 - Wealth inequality

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Credit crunches and credit allocation in a model of entrepreneurship

Abstract

Bibliographical note

Keywords

UN SDGs

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