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Entrepreneurial risk choice and credit market equilibria
Authors
Kerstin Gerling
Michal Kowalik
Heiner Schumacher
Publication date
1 January 2015
Publisher
'Elsevier BV'
Doi
Abstract
© by De Gruyter 2015. 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.status: publishe
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Last time updated on 10/12/2019