Fiscal Policy and Entrepreneurship

Abstract

This paper reexamines the effect of expansionary fiscal policy on the real GDP in the presense of entrepreneurship - firms' activities to predict and react to changes in consumers' taste. The existence of partial crowding out in this paper generates a trade off between private consumption and government expenditure. Since goverment expenditure can not reflect changes in consumers' taste, it reduces the importance of firms' ability to process local information for predicting changes in consumers' taste. It is shown that expansionary fiscal policy can lower the real GDP when idiosyncratic risk and the substitutability of goods are large, and firms have great ability to predict the changes. This paper also shows that expansionary fiscal policy discourgages investment in prediction ability in the short run, but does not affect it in the long runEntrepreneurship, Fiscal Policy