Entrepreneurs,risk aversion, and dynamic firms

Neus Herranz, Stefan Krasa, Anne P. Villamil

Research output: Contribution to journalArticle

Abstract

How do entrepreneurs vary firm size, capital structure, and default to manage risk? We show that more risk-averse entrepreneurs run smaller, more highly leveraged firms and default less, because running a smaller firm with higher debt reduces personal funds at risk in the firm. Optimal default depends on ex ante debt, consumption forgone from firm liquidation, and owner capacity to inject funds. We show that entrepreneurs sacrifice current consumption in the hope of future success that never materializes for the bottom 25 percent, but entrepreneurship is a path toward great wealth and high consumption for the top quartile.

Original languageEnglish (US)
Pages (from-to)1133-1176
Number of pages44
JournalJournal of Political Economy
Volume123
Issue number5
DOIs
StatePublished - Oct 2015

ASJC Scopus subject areas

  • Economics and Econometrics

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