Hostname: page-component-cd9895bd7-jkksz Total loading time: 0 Render date: 2024-12-29T01:43:41.091Z Has data issue: false hasContentIssue false
  • English
  • Français

LONG-TERM INVESTMENT AND NET-WORTH BUILDING WITH LIMITED CONTRACT ENFORCEMENT

Published online by Cambridge University Press:  24 June 2014

Burak R. Uras
Burak R. Uras*
Affiliation:
Tilburg UniversityEuropean Banking Center and CentER
*
Address correspondence to: Burak R. Uras, Department of Economics, Tilburg University5000 LE, Tilburg, The Netherlands; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper develops a firm dynamics model augmented with an endogenous net-worth-building feature at the firm level and investigates how opportunities for entrepreneurs to accumulate wealth can mitigate the implications of limited enforceability for resource allocation, productivity, and macroeconomic development. In the steady-state equilibrium of the model, financially constrained entrepreneurs select short-term investment projects because short-term investment enhances net-worth building and relaxes credit constraints. The limited contract enforceability suppresses macroeconomic output; however, entrepreneurial net-worth building offsets the per capita income losses. I calibrate the steady state of the model for the U.S. economy as a baseline and conduct quantitative exercises. The counterfactual simulations reveal that net-worth building could reduce, for instance, about two-thirds of the per capita income discrepancy between the United States and Brazil that can be attributed to limited enforcement. The theoretical and quantitative results from the paper are highly relevant to financial development and entrepreneurship policies implemented in developing countries.

Keywords

Net-Worth BuildingLimited EnforcementAllocationsTotal Factor Productivity
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 1 , January 2016 , pp. 276 - 312
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Antunes, Antonio, Cavalcanti, Tiago, and Villamil, Anne P. (2008) The effect of financial repression and enforcement on entrepreneurship and economic development. Journal of Monetary Economics 55 (2), 278–297.CrossRefGoogle Scholar
Asiedu, Elizabeth and Villamil, Anne P. (2002) Imperfect enforcement, foreign investment, and foreign aid. Macroeconomic Dynamics 6 (4), 476–495.CrossRefGoogle Scholar
Azariadis, Costas and Kaas, Leo (2008) Credit and growth under limited commitment. Macroeconomic Dynamics 12, 20–30.CrossRefGoogle Scholar
Banerjee, Abhijit and Moll, Benjamin (2010) Why misallocation persists? American Economic Journal: Macroeconomics 2 (1), 189–206.Google Scholar
Baumol, William J. (1996) Entrepreneurship: Productive, unproductive, and destructive. Journal of Business Venturing 11 (1), 3–22.CrossRefGoogle Scholar
Beck, Thorsten, Demirguc-Kunt, Asli, Laeven, Luc, and Levine, Ross (2008) Finance, firm size, and growth. Journal of Money, Credit and Banking 40 (7), 1379–1405.CrossRefGoogle Scholar
Buera, Francesco and Shin, Yongseok (2013) Financial frictions and the persistence of history: A quantitative exploration. Journal of Political Economy 121 (2).CrossRefGoogle Scholar
Buera, Francesco, Shin, Yongseok, and Kaboski, Joseph (2013) Finance and development: A tale of two sectors. American Economic Review 101, 1964–2002.CrossRefGoogle Scholar
Cagetti, Marco and Nardi, Mariacristina De (2006) Entrepreneurship, frictions and wealth. Journal of Political Economy 114 (5), 835–870.CrossRefGoogle Scholar
Caselli, Francesco (1999) Technological revolutions. American Economic Review 89 (1), 78–102.CrossRefGoogle Scholar
Chen, Been-Lon, Mo, Jie-Ping, and Wang, Ping (2002) Market frictions, technology adoption and economic growth. Journal of Economic Dynamics and Control 26 (11), 1927–1954.CrossRefGoogle Scholar
Cole, Harold L., Greenwood, Jeremy, and Sanchez, Juan M. (2012) Why Doesn't Technology Flow from Rich to Poor Countries? Working papers, Federal Reserve Bank of St. Louis.Google Scholar
Cooley, Thomas, Marimon, Ramon, and Quadrini, Vincenzo (2004) Aggregate consequences of limited contract enforceability. Journal of Political Economy 112 (4), 817–847.CrossRefGoogle Scholar
De Soto, Hernando (2000) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books.Google Scholar
Evans, David S. and Jovanovic, Boyan (1989) An estimated model of entrepreneurial choice under liquidity constraints. Journal of Political Economy 97 (4), 808–827.CrossRefGoogle Scholar
Gollin, Douglas (2002) Getting income shares right. Journal of Political Economy 110 (2), 458–474.CrossRefGoogle Scholar
Haltiwanger, John, Jarmin, Ron S., and Miranda, Javier (2013) Who creates jobs? Small versus large versus young. Review of Economics and Statistics 95 (2), 347–361.CrossRefGoogle Scholar
Hsieh, Chang-Tai and Klenow, Pete J. (2009) Misallocation and manufacturing TFP in China and India. Quarterly Journal of Economics 124 (4), 1403–1448.CrossRefGoogle Scholar
Hurst, Erik and Lusardi, Annamaria (2004) Liquidity constraints, wealth accumulation and entrepreneurship. Journal of Political Economy 112 (2), 319–347.CrossRefGoogle Scholar
Jeong, Hyeok and Townsend, Robert M. (2007) Sources of TFP growth: Occupational choice and financial deepening. Economic Theory 32, 179–221.CrossRefGoogle Scholar
Jiang, Neville, Wang, Ping, and Wu, Haibin (2010) Ability-heterogeneity, entrepreneurship, and economic growth. Journal of Economic Dynamics and Control 34 (3), 522–541.CrossRefGoogle Scholar
Johnson, Simon, McMillan, John, and Woodruff, Christopher (1999) Contract Enforcement in Transition. CESifo working paper 211.Google Scholar
Khan, Aubhik (2001) Financial development and economic grwoth. Macroeconomic Dynamics 5 (3), 41–433.CrossRefGoogle Scholar
Kihlstrom, Richard and Laffont, Jean-Jacques (1979) A general equilibrium theory of firm formation based on risk aversion. Journal of Political Economy 87 (4), 719–748.CrossRefGoogle Scholar
La Porta, Rafael, Lopez-de-Silanes, Florencio, Shleifer, Andrei, and Vishny, Robert W. (1998) Law and finance. Journal of Political Economy 106 (6), 1113–1155.CrossRefGoogle Scholar
Lucas, Robert E. Jr. (1978) On the size distribution of business firms. Bell Journal of Economics 9 (2), 508–523.CrossRefGoogle Scholar
Maddison, Angus (1995) Monitoring the World Economy 1820–1992. Paris: Organization for Economic Cooperation and Development.Google Scholar
Mokyr, Joel (1990) The Lever of Riches: Technological Creativity and Economic Progress. New York: Oxford University Press.Google Scholar
Newman, Andrew F. (2007) Risk-bearing and entrepreneurship. Journal of Economic Theory 137 (1), 11–26.CrossRefGoogle Scholar
Parker, Simon C. (2007) Law and economics of entrepreneurship. Comparative Labor Law and Policy Journal 28, 695–716.Google Scholar
Quadrini, Vincenzo (1999) The importance of entrepreneurship for wealth concentration and mobility. Review of Income and Wealth 45 (1), 7–19.CrossRefGoogle Scholar
Quintin, Erwan (2008) Limited enforcement and the organization of production. Journal of Macroeconomics 30 (3), 1222–1245.CrossRefGoogle Scholar
Restuccia, Diego and Rogerson, Richard (2008) Policy distortions and aggregate productivity with heterogeneous establishments. Review of Economic Dynamics 11 (4), 707–720.CrossRefGoogle Scholar
Schumpeter, Joseph (1911) Theory of Economic Development. New Brunswick, NJ: Transaction Publishers.Google Scholar
Wiggins, Steven N. (1995) Entrepreneurial enterprises, endogenous ownership, and the limits to the firm size. Economic Inquiry 33 (1), 54–69.CrossRefGoogle Scholar
World Bank (2012). Doing Business 2001–2012. Washington, DC: World Bank.Google Scholar