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Federal Reserve Bank of Richmond
Working Paper
An Estimated Structural Model of Entrepreneurial Behavior
John Bailey Jones
Sangeeta Pratap
Abstract

Using a rich panel of owner-operated New York dairy farms, we provide new evidence on entrepreneurial behavior. We formulate a dynamic model of farms facing uninsured risks and financial constraints. Farmers derive nonpecuniary benefits from operating their businesses. We estimate the model via simulated minimum distance, matching both production and financial data. We find that financial factors and nonpecuniary benefits are of first-order importance. Collateral constraints and liquidity restrictions inhibit borrowing and the accumulation of capital. The nonpecuniary benefits to farming are large and keep small, low-productivity farms in business. Although farmers are risk averse, eliminating uninsured risk has only modest effects on capital and output.


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John Bailey Jones & Sangeeta Pratap, An Estimated Structural Model of Entrepreneurial Behavior, Federal Reserve Bank of Richmond, Working Paper 17-7, 08 May 2017.
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Keywords: Entrepreneurs; financial constraints
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