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Entrepreneurship Frictions and Wealth

Source: www.minneapolisfed.org
Topic: Entrepreneurship

Sort Desciption: Entrepreneurship is an important determinant of capital accumulation and wealth con- .... highlights the key role of entrepreneurship in generating a skewed ...

Content Inside: Federal Reserve Bank of Minneapolis Research Department Staff Report 322 September 2003 Entrepreneurship Frictions and Wealth Marco Cagetti University of Virginia Mariacristina De Nardi University of Minnesota and Federal Reserve Bank of Minneapolis ABSTRACT Although the role of financial constraints on entrepreneurial choices has received considerable at- tention the effects of these constraints on aggregate capital accumulation and wealth inequality are less known. Entrepreneurship is an important determinant of capital accumulation and wealth con- centration and conversely the distribution of wealth affects entrepreneurial choices in the presence of borrowing constraints. We construct a model that matches wealth inequality very well for both entrepreneurs and non-entrepreneurs and find that more restrictive borrowing constraints generate less wealth concentration but also reduce average firm size aggregate capital and the fraction of entrepreneurs. We also find that voluntary bequests are an important channel that allows some high-ability workers to establish or enlarge an entrepreneurial activity: with accidental bequests only there would be fewer large firms fewer entrepreneurs and less aggregate capital but also less wealth concentration. Cagetti: cacio@virginia.edu; De Nardi: nardi@econ.umn.edu. We gratefully acknowledge financial support from NSF grants SES-0317872 and SES-0318014. De Nardi also thanks the University of Minnesota Grant- in-Aid for funding. We are grateful to Marco Bassetto V. V. Chari Narayana Kocherlakota Per Krusell Ellen McGrattan Victor Ros-Rull Emmanuel Saez Jenni Schoppers and Kjetil Storesletten for helpful comments. The views herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis the Federal Reserve System or the NSF. 1 Introduction Many empirical studies find that potential and existing entrepreneurs face borrowing constraints and that the decision to become an entrepr ...

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