Working Paper

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 in this set-up, 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: Credit; Entrepreneurship - Econometric models;

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Authors

    Bassetto, Marco

    Cagetti, Marco

    De Nardi, Mariacristina

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2013

Number: WP-2013-06