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American Economic Review: Vol. 99 No. 5 (December 2009)

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Risk Taking by Entrepreneurs

Article Citation

Vereshchagina, Galina, and Hugo A. Hopenhayn. 2009. "Risk Taking by Entrepreneurs." American Economic Review, 99(5): 1808-30.

DOI: 10.1257/aer.99.5.1808

Abstract

Entrepreneurs bear substantial risk, but empirical evidence shows no sign of a positive premium. This paper develops a theory of endogenous entrepreneurial risk taking that explains why self-financed entrepreneurs may find it optimal to invest in risky projects offering no risk premium. Consistently with empirical evidence, the model predicts that poorer entrepreneurs are more likely to undertake risky projects. It also finds that incentives for risk taking are stronger when agents are impatient. (JEL G31, G32, L25, L26)

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Authors

Vereshchagina, Galina (AZ State U)
Hopenhayn, Hugo A. (UCLA)

JEL Classifications

G31: Capital Budgeting; Fixed Investment and Inventory Studies
G32: Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
L25: Firm Performance: Size, Diversification, and Scope
L26: Entrepreneurship


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