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Title: Entrepreneurial Choice and Knightian Uncertainty with Borrowing Constraints
Authors: Adachi, Takanori
Asano, Takao
Keywords: Entrepreneurship
Knightian Uncertainty
Risk
Borrowing Constraints
Issue Date: Dec-2011
Publisher: Institute of Economic Research, Kyoto University
Journal title: KIER Discussion Paper
Volume: 803
Abstract: This paper studies the effects of Knightian uncertainty, or ambiguity, on entrepreneurial choice. By distinguishing between risk and ambiguity, we first show that ambiguity aversion makes it less likely that an individual will become an entrepreneur. It is also shown that an increase in ambiguity unambiguously reduces the amount of investment. In the presence of borrowing constraints, the less ambiguity averse is the individual, the more likely is his or her investment to be constrained. More importantly, constrained wage workers, who would become entrepreneurs in the absence of credit market imperfection, emerge if and only if the market wage is high enough. These individuals are characterized by an intermediate degree of ambiguity aversion. When interpreting these constrained wage workers as managerial and professional workers, our model predicts the rise of such workers in the process of economic development.
URI: http://hdl.handle.net/2433/151797
Appears in Collections:KIER Discussion Paper (English)

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