ENTREPRENEURSHIP WITH FINANCIAL AND UNEMPLOYMENT FRICTIONS
Keywords:
financial frictions, employment frictions, entrepreneurship, business cycles
Abstract
Financial frictions for capital and unemployment frictions for labor is said to be main drivers of the business cycle dynamics.Large literature in general equilibrium models of entrepreneurship exists whereby financial frictions play major role in the underlying incentives and motives to trade. In these models entrepreneur wealth shock has different effect on the baseline (frictionless) economy and the economy with financial and unemployment frictions.Entrepreneurs are iintroduced in the models and they posses different abilities (measured by low,medium,high productivity) which in turn affects aggregate savings and aggregate wealth of the economies.In these models financial frictions are introduced following assumption that working capital loans are frictionless. Each entrepreneur faces probability of exit from economy (bankruptcy probability) which is identical for all entrepreneurs in the economy. In the endogenous entrepreneurship and financial frictions model it is shown that occupation choice is different for worker or entrepreneur based on productivity: low (worker) or high (entrepreneur) which in turn affects the aggregate wealth of the economy. Also, in this model it is shown that interest rate in the economy is determined by the intersection of total wealth with public and private capital.
References
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2. Achdou, Y. Han, J. Lasry, J-M. Lions, P-L. Moll, B.(2022). Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach, The Review of Economic Studies,Volume 89,Issue 1,Pages 45-86
3. Achdou, Yves, Jean-Michel Lasry, Pierre-Louis Lions, and Benjamin Moll. (2014).Wealth Distribution and the Business Cycle: The Rold of Private Firms.Princeton University Working Papers.
4. Aiyagari, S. R. (1994). Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, 109(3), pp.659-84
5. Akerlof, G. A. (1980). A Theory of Social Custom, of Which Unemployment May be One Consequence. Quarterly Journal of Economics 94 (4): 749–75.
6. Akerlof, G. A. (1982). Labor Contracts as Partial Gift Exchange. Quarterly Journal of Economics 97 (4): 543–69
7. Akyol,A. Athreya,K.(2007).Unsecured credit and selfemployment. Unpublished manuscript, York University and Federal Reserve Bank of Richmond
8. Andolfatto, D. (1996). Business cycles and labor-market search. American Economic Review, 86, 112–132.
9. Arrow, J. (1951). An Extension of the Basic Theorems of Classical Welfare Economics. In J. Neyman (ed.), Proceedings of the Second Berkeley Symposium on Mathematical Statistics and Probability (p./pp. 507--532),: University of California Press.
10. Arrow, K. J. (1965). The theory of risk aversion. Aspects of the Theory of Risk Bearing. Helsinki: Yrjo Jahnssonin Saatio. Reprinted in: Essays in the Theory of Risk Bearing. Chicago: Markham. 1971. pp. 90–109
11. Arrow, Kenneth J.; Debreu, Gérard (1954). Existence of an equilibrium for a competitive economy. Econometrica. The Econometric Society. 22 (3): 265–90. doi:10.2307/1907353. JSTOR 1907353
12. Auerbach, A. J. Kotlikoff, L. J. (1983). National Savings, Economic Welfare, and the Structure of Taxation. In M. Feldstein (Ed.), Behavioral Simulation Methods in Tax Policy Analysis, pp. 459–498. University of Chicago Press.
13. Banerjee AV, Duflo E. 2005. Growth theory through the lens of development economics. In Handbook of Economic Growth, Vol. 1A, ed. P Aghion, SN Durlauf, pp. 473–552. Amsterdam: North-Holland
14. Barro, R., (1977). Long-term contracting, sticky prices and monetary policy. Journal of Monetary Economics 3 (3), 305–316
15. Bassetto M, Cagetti M, Nardi MD. (2013). Credit crunches and credit allocation in a model of entrepreneurship. NBER Work. Pap. 19296
16. Bernanke, B., Gertler, M., Gilchrist, S., (1999). The financial accelerator in a quantitative business cycle framework. In: Taylor, J.B., Woodford, M. (Eds.), Handbook of Macroeconomics, vol. 1. , Elsevier Science, pp. 1341–1393.
17. Blanchard, O. and J. Gali (2010). Labor markets and monetary policy: A new Keynesian model with unemployment. American Economic Journal: Macroeconomics, 2, 1–30.
18. Boar, C. V. Midrigan (2020). Efficient Redistribution. mimeo. New York University.
19. Bohacek,R.(2006). Financial constraints and entrepreneurial investment. Journal of Monetary Economics, 53(8):2195–212
20. Boppart,T.,Krusell,P.Mitman,K.(2018).Exploiting MIT shocks in heterogeneous-agent economies: the impulse response as a numerical derivative. Journal of Economic Dynamics and Control,Volume 89,pp. 68-92
21. Boppart,T.,Krusell,P.Mitman,K.(2018).Exploiting MIT shocks in heterogeneous-agent economies: the impulse response as a numerical derivative. Journal of Economic Dynamics and Control,Volume 89,pp. 68-92
22. Buera FJ, Fattal-Jaef R, Shin Y. (2014). Anatomy of a credit crunch: from capital to labor markets. NBERWork.Pap. 19997
23. Buera FJ, Moll B. (2012). Aggregate implications of a credit crunch. NBER Work. Pap. 17775
24. Buera, Francisco, Kaboski, Joseph ,Shin, Yongseok. (2015). Entrepreneurship and Financial Frictions: A Macro-Development Perspective. Annual Review of Economics. 7. 150504160918000. 10.1146/annurev-economics-080614-115348.
25. Buera, Francisco J, Joseph P Kaboski, and Yongseok Shin (2011). Finance and Development: A Tale of Two Sectors. American Economic Review 101.5, pp. 1964–2002.
26. Buera, Francisco J., and Yongseok Shin. 2013. “Financial Frictions and the Persistence of History: A Quantitative Exploration.” Journal of Political Economy, Forthcoming.
27. Buera. Francisco J. (2007).A dynamic model of entrepreneurship with borrowing constraints: Theory and evidence. Unpublished manuscript, Northwestern University
28. Cagetti, Marco, and Mariacristina De Nardi. 2006. “Entrepreneurship, Frictions, and Wealth.” Journal of Political Economy, 114(5): 835–870.
29. Cagetti,M. DeNardi,M(2004). Taxation, entrepreneurship, and wealth. Federal Reserve Bank of Minneapolis Staff Report no. 340
30. Cagetti,M. DeNardi,M.(2006). Entrepreneurship, frictions and wealth. Journal of Political Economy, 114(5):835–70
31. Carlin, W., and D. Soskice. (2006). Macroeconomics: Imperfections, institutions and policies. Oxford: Oxford University Press.
32. Carroll,D.C.(1997). Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis, The Quarterly Journal of Economics,Vol. 112, No. 1 (Feb., 1997), pp. 1-55 (55 pages)
33. Christiano, L., Motto, R., Rostagno, M., (2003). The great depression and the Friedman–Schwartz hypothesis. Journal of Money, Credit, and Banking 35, 1119–1198.
34. Christiano, L., Motto, R., Rostagno, M., (2003). The great depression and the Friedman–Schwartz hypothesis. Journal of Money, Credit, and Banking 35, 1119–1198.
35. Christiano, L., Motto, R., Rostagno, M., (2008). Shocks, structures or monetary policies? The Euro Area and US after 2001. Journal of Economic Dynamics and Control 32 (8), 2476–2506
36. Christiano, L., Motto, R., Rostagno, M., (2008). Shocks, structures or monetary policies? The Euro Area and US after 2001. Journal of Economic Dynamics and Control 32 (8), 2476–2506.
37. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl,( 2011). Introducing Financial Frictions and Unemployment into a Small Open Economy Model, Journal of Economic dynamics and control 35.,pp.1999-2041
38. Chugh, S. K. (2015). Modern macroeconomics. 1st ed. Cambridge, MA: MIT Press.
39. Diamond, P. A. (1982). Wage determination and efficiency in search equilibrium. Review of Economic Studies 49: 217–27
40. Dynan, K. (1993). How Prudent Are Consumers? The Journal of Political Economy, 101(6), 1104-13
41. Ewald-Christian,O.(2003). Introduction to continuous time Financial Market models. School of Economics and Finance University of St.Andrews
42. Fokker, A. D. (1914). Die mittlere Energie rotierender elektrischer Dipole im Strahlungsfeld. Ann. Phys. 348 (4. Folge 43):pp. 810–820.
43. Gardiner, C. (2009). Stochastic Methods (4th ed.). Berlin: Springer. ISBN 978-3-642-08962-6.
44. Geanakoplos, J. (1990). An introduction to general equilibrium with incomplete asset markets. Journal of Mathematical Economics, 19(1-2), pp. 1–38.
45. Geanakoplos, J.D.; Polemarchakis, H.M. (1986). Existence, regularity and constrained suboptimality of competitive allocations when the asset structure is incomplete. In Hell, W.P.; Starr, R.M.; Starrett, D.A. (eds.). Uncertainty, information and communication: Essays in honor of K.J. Arrow. Vol. 3. Cambridge University Press. pp. 65–95. ISBN 9780521327046.
46. Gertler, M. and A. Trigari (2009). Unemployment fluctuations with staggered Nash wage bargaining. Journal of Political Economy, 117, 38–86.
47. Greif, Constantin, (2017). Numerical Methods for Hamilton-Jacobi-Bellman Equations, Theses and Dissertations. 1480.
48. Guerrieri, V., G. Lorenzoni, L. Straub, and I. Werning (2020). Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? NBER Working Paper 26918.
49. Guntin, R.,Kochen,F.(2022).Entrepreneurship, Financial Frictions, and the Market for Firms, NYU’s 3rd year paper workshop and Universidad de Montevideo (UM) seminar.
50. Hall, R., (2005). Job loss, job finding, and unemployment in the U.S. economy over the past fifty years. In: Gertler, M., Rogoff, K. (Eds.), NBER Macroeconomics Annual, MIT Press, pp. 101–137
51. Hall, R.E. (1978). Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence. The Journal of Political Economy, 86(6), 971-987.
52. Hall, R.E.(2012). The 2010 Nobel Prize in Economics: How the DMP Model Explains Current High Unemployment. National Bureau of Economic Research
53. Hsieh C-T, Klenow P. 2014. The life cycle of plants in India and Mexico. Q. J. Econ. 129:1035–84
54. Hsieh, Chang-Tai and Peter J Klenow (2009). Misallocation and Manufacturing TFP in China and India. The Quarterly Journal of Economics 124.4, pp. 1403–1448
55. Huggett, M. (1993). The Risk-Free Rate in Heterogeneous-Agent Incomplete Insurance Economies, Journal of Economic Dynamics and Control 17, pp.953–969
56. Huggett, M. (1993). The Risk-Free Rate in Heterogeneous-Agent Incomplete Insurance Economies, Journal of Economic Dynamics and Control 17, pp.953–969
57. Judd, K. L. (1985). Short-Run Analysis of Fiscal Policy in a Simple Perfect Foresight Model.Journal of Political Economy 93, pp.298–319.
58. Kaplan, G., B. Moll, G. L. Violante (2018). Monetary Policy According to HANK. American Economic Review 108, pp.697–743.
59. King RG, Levine R. 1993. Finance, entrepreneurship and growth: theory and evidence. J. Monet. Econ.32:513–42
60. Kitao.S.(2008) Entrepreneurship, taxation and capital investment. Review of Economic Dynamics, 11(1):44–69
61. Kiyotaki N, Moore J. (2012). Liquidity, business cycles, and monetary policy. NBER Work. Pap. 17934
62. Kolmogorov,A.(1931). Über die analytischen Methoden in der Wahrscheinlichkeitstheorie [On Analytical Methods in the Theory of Probability]. Mathematische Annalen (in German). 104 (1): 415–458 [pp. 448–451].
63. Kramers, H. A. (1940). Brownian motion in a field of force and the diffusion model of chemical reactions. Physica. 7 (4): 284–304. Bibcode:1940Phy.....7..284K. doi:10.1016/S0031-8914(40)90098-2. S2CID 33337019.
64. Li,W.(2000). Entrepreneurship and government subsidies: A general equilibrium analysis. Journal of Economic Dynamics and Control, 26(11):1815–44
65. Lindbeck, Assar, and Dennis J. Snower. (1988). The Insider-Outsider Theory of Employment and unemployment. Cambridge, MA: MIT Press
66. Mas-Colell, A. (1989).The Theory of General Economic Equilibrium: A Differentiable Approach, Cambridge University Press.
67. Meh, C. A. (2005). Entrepreneurship, wealth inequality, and taxation. Review of Economic Dynamics, 8(3):688–719
68. Meh, C. A. , Terajima,Y.(2007). Personal bankruptcy and entrepreneurship. Unpublished manuscript, Bank of Canada
69. Merz, M. (1995), Search in labor market and the real business cycle. Journal of Monetary Economics, 95, 269–300.
70. Midrigan, Virgiliu ,Daniel Yi Xu (2014). Finance and Misallocation: Evidence from Plant-Level Data. American Economic Review 104.2, pp. 422–458.
71. Mortensen, Dale T., and Christopher A. Pissarides. (1994). Job Creation and Job Destruction in the Theory of Unemployment. Review of Economic studies 61 (3): 397–415.
72. Moyal, J. E. (1949). Stochastic processes and statistical physics. Journal of the Royal Statistical Society. Series B (Methodological). 11 (2): 150–210. JSTOR 2984076.
73. Petrosky-Nadeau, N., L. Zhang, and L. Kuehn (2015). Endogenous disasters. Working paper, Federal Reserve Bank of San Francisco and The Ohio State University
74. Petrosky-Nadeau, Zhang L. (2017). Solving the Diamond–Mortensen–Pissarides model accurately. Quantitative Economics 8 (2017), 611–650
75. Pissarides, C. A. (1985). Short-run equilibrium dynamics of unemployment, vacancies, and real wages. American Economic Review 75: 676-90.
76. Pissarides, C. A. 1985. Short-run equilibrium dynamics of unemployment, vacancies, and real wages. American Economic Review 75: 676-90.
77. Planck, M. (1917). Über einen Satz der statistischen Dynamik und seine Erweiterung in der Quantentheorie. Sitzungsberichte der Preussischen Akademie der Wissenschaften zu Berlin. 24: pp.324–341.
78. Quadrini V. 2009. Entrepreneurship in macroeconomics. Ann. Finance 5:295–311
79. Quadrini,V.(2000).Entrepreneurship, saving and social mobility. Review of Economic Dynamics, 3(1):1–40.
80. Shourideh A, Zetlin-Jones A. (2014).External financing and the role of financial frictions over the business cycle:measurement and theory. Unpublished manuscript, Carnegie Mellon Univ., Pittsburgh, PA
81. Smoluchowski, M. (1916). "Drei Vorträge über Diffusion, Brownsche Molekularbewegung und Koagulation von Kolloidteilchen". Phys. Z. (in German). 17: 557–571, 585–599.
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Published
2023-05-17
Section
Articles
