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Entrepreneurial risk aversion, net worth effects and real fluctuations
Author(s) -
Pardo Cristian
Publication year - 2013
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2013.05.007
Subject(s) - economics , risk aversion (psychology) , equity premium puzzle , risk premium , investment (military) , private equity , net worth , equity (law) , debt , private information retrieval , general equilibrium theory , monetary economics , microeconomics , financial economics , expected utility hypothesis , finance , statistics , mathematics , politics , political science , law
This paper examines the combined effect of asymmetric information and private entrepreneurial risk aversion on investment decisions. The standard optimal debt contract becomes modified by the introduction of insurance and a risk premium that entrepreneurs demand due to the uncertainty of their investment returns: the private equity premium. In general equilibrium, the private equity premium may become a mechanism that magnifies the effects of shocks. A structural estimation of the model's parameters using Chilean and U.S. data shows that the entrepreneurial risk aversion assumption has more empirical relevance in an economy where smaller privately‐held businesses are relatively more prevalent than where the corporate sector predominates, like the U.S.