occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

collateral in credit rationing in markets with imperfect information note in their 1981 article joseph stiglitz and andrew weiss analyze adverse selection and incentive effects in the loan market the models considered are based on two crucial assumptions borrowers are subject to limited liability and lenders cannot distinguish borrowers projects of different risk stiglitz and weiss show that a bank that raises its interest rate may suffer adverse selection because only risky borrowers will be willing to borrow at the higher rate thus lenders may choose not to raise the interest rate to eliminate excess demand resulting in the possibility of a credit rationing equilibrium stiglitz and weiss also consider briefly the role of collateral in such credit rationing models they conclude that lenders may choose not to use collateral requirements as a rationing device an increase in collateral requirements like an increase in the interest rate potentially leads to a decrease in the lender s expected return on loans because of resulting adverse incentive and selection effects the purpose of this note is to further investigate the role of collateral in these models stiglitz and weiss discussion in section iii establishes that adverse selection effects can result from increases in collateral when borrowers are risk averse i will show by returning to a model they discussed earlier in section i that the adverse selection effects can also occur when borrowers are risk neutral stiglitz and weiss outline a model to consider the use of collateral as a rationing device section iii in that model all potential borrowers face the same array of risky projects each potential borrower chooses at most one of those projects to undertake the individuals are by assumption risk averse with decreasing absolute risk aversion and possess different amounts of initial wealth thus choice of project if any to undertake and the method of finance selffinance from initial wealth or loan finance will differ from one individual to the next stiglitz and weiss show that among those who undertake risky projects and who choose borrowing as the method of finance wealthier individuals undertake riskier projects an increase in collateral has two effects on the market for loans those individuals who remain in the market will choose to undertake less risky projects and those individuals who drop out of the market are less wealthy low risk borrowers if the second effect is sufficiently strong then increased collateral requirements will mean decreased expected returns for the lender thus a credit rationing equilibrium may occur since lenders may not choose to use collateral requirements or the interest rate to eliminate excess demand the adverse selection effect just described does not occur in this model if the individuals are risk neutral consequently the potential for a credit rationing equilibrium is limited to cases where borrowers are risk averse to see that increases in collateral requirements can also result in adverse selection if borrowers are risk neutral consider the model stiglitz and weiss used to analyze the adverse selection effects of increases in the interest rate section i pp 395 99 it differs from the section iii model discussed above in three ways first borrowers are risk neutral second all projects ar loan financed the analogy to the section iii model is that no individuals have sufficient wealth to self finance projects third in the section

collateral and credit rationing a review of recent empirical studies as a guide for future research abstract the relationship between firms and banks often suffers from informational opacity that may result in credit rationing in theory providing collateral to the bank can have a mitigating effect on these informational asymmetries and thus solve the credit rationing problem even though collateral is already a widespread debt contract feature recent trends predict that in the future collateral will become even more important for informationally opaque firms the aim of this paper is twofold first we provide a review of the recently growing empirical research on collateral as a remedy for credit rationing second we would like to pinpoint gaps and limitations in current empirical research most studies contend with a flawed research design by not distinguishing between business and personal collateral and excluding other information opaqueness reducing tools such as the strength of the relationship between borrower and lender loan maturity and covenants we also discuss the limitations of using a single equation estimation method and the usefulness of incorporating interaction effects into the estimation models finally we provide suggestions for fruitful research avenues that would fill these gaps and enrich the empirical knowledge in this research domain

the option to wait to invest and equilibrium credit rationing stiglitz and weiss 1981 show that firms considering risky projects have higher reservation interest rates and hence it is optimal for a bank to reduce loan supply in this note we show that when the risk involved in an investment will be resolved in the future investors with riskier projects have a greater return from waiting more risky projects have lower reservation interest rates and hence there is no motive for banks to ration credit demand

social capital informal governance and post ipo firm performance a study of chinese entrepreneurial firms social capital can serve as informal governance in weak investor protection regimes using hand collected data on entrepreneurs political connections and firm ownership we construct several original measures of social capital and examine their effect on the performance of entrepreneurial firms in china after their initial public offerings political connections or a high percentage of external investors tend to enhance firm performance but intragroup related party transactions commonly lead to performance decline these forms of social capital have a strong influence on the performance of chinese firms whereas formal governance variables such as board size or board independence have little effect although social capital may serve as an informal governance mechanism and effectively substitute for formal governance mechanisms in an emerging market this role of social capital raises several ethical concerns notably the development of rent seeking and crony capitalism

competitive equilibrium in the credit market under asymmetric information abstract we study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers default probabilities admissible credit contracts are characterized by the credit granting probability the loan quantity the loan interest rate and the collateral required the principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers moreover the lower risk borrowers get more credit in equilibrium than they would with full information no credit is rationed and collateral requirements are higher for the lower risk borrowers

the role of collateral in credit markets with imperfect information abstract the paper analyzes the structure of credit market equilibrium under imperfect information collateralization and credit rationing are compared as alternative means to cope with problems of adverse selection and moral hazard it is shown that lenders may use collateral as a self selection and incentive mechanism rationing occurs only if the borrowers collaterizable wealth is too small to allow perfect sorting or to create sufficiently strong incentives whenever there is rationing in an equilibrium some borrowers are charged the maximum amount of collateral

political connections and entrepreneurial investment evidence from china s transition economy abstract recent literature in entrepreneurship suggests that market and legal institutions matter for entrepreneurial investment yet prior studies have focused on the role of formal institutions building on new institutional theory and political connections literature this study aims to evaluate the role of political connections in entrepreneurial reinvestment in less developed and transition economies the purpose of this paper is threefold first it aims to demonstrate systematically how political connections affect entrepreneurial reinvestment second it applies this relationship to a subsample group i e small and medium enterprises smes in order to empirically test whether political connections are more beneficial for large firms or smes third it demonstrates that political connections substitute for rather than complement formal market and legal institutions the empirical test uses a nationally representative sample of entrepreneurial firms from china s transition economy

can socioeconomic heritage produce a lost generation with regard to entrepreneurship a considerable amount of literature deals with the influence of institutions on entrepreneurship but for all that little is known about the interplay between institutions and personal determinants of entrepreneurship in this paper the empirical evidence that older people in transition economies have low engagement in entrepreneurial activity is the starting point for analyzing how institutions moderate the relationship between individual characteristics and entrepreneurial choice the results show that the socioeconomic heritage of being exposed to socialism deters entrepreneurship an effect that is more pronounced for high impact entrepreneurship detailed analyses reveal that the effect is driven by devaluation of socialist work experience and the influence of socialism on mindset

why does sovereign risk differ for domestic and external debt evidence from scandinavia 1938 1948 abstract this study shows empirically that the political costs of sovereign default can differ considerably for domestic and external debt the analysis uses new evidence from danish and swedish bond markets around world war ii a time when markets went from being fully integrated to fully segmented overnight by linking the exogenous wartime shocks to changes in default costs on domestic and external debt it is found that these costs explain a significant part of the variation in the sovereign yield spread across markets the results suggest that governments can choose strategically on which debt the domestic or the external to default on and that this decision hinges on the relative size of the political default costs

regional institutional development political connections and entrepreneurial performance in china s transition economy while previous research emphasizes the role of political connections in facilitating entrepreneurial performance during china s early reform period 1978 1999 this study argues that regional institutions were increasingly conducive to entrepreneurial activities and thus also played a key role in china s entrepreneurial success during that period the purpose of this study is twofold first it aims to demonstrate how regional institutional development facilitated entrepreneurial performance in china second it aims to understand how formal institutional development among chinese regions affected the role of political connections using a two level hierarchical dataset on chinese private enterprises this study finds that not only legal protection of property rights but also the development of market systems mattered for entrepreneurial performance in addition it shows that political connections played a diminishing role during regional institutional development in china

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

what is challenging renewable energy entrepreneurs in developing countries this paper cumulates the findings from a review of the challenges faced by renewable energy entrepreneurs in developing countries to date research that could facilitate the success of renewable energy entrepreneurs in the world s developing regions has been fragmented across two main bodies of literature management specifically entrepreneurship and renewable energy by conducting a qualitative review of the extant literature i propose that the findings from both bodies of research may be distilled to six 6 key challenges inadequate access to institutional finance the price of renewable energy technologies rets the lack of skilled labour underdeveloped physical infrastructure and logistics power dominance of incumbents inadequate government or policy support through this research i not only advance a unified conceptualisation of the challenges faced by renewable energy entrepreneurs in developing countries but also highlight a number of the revealed opportunities for future research

too much investment a problem of asymmetric information this paper shows that under plausible assumptions the inability of lenders to discover all of the relevant characteristics of borrowers results in investment in excess of the socially efficient level raising the rate of interest above the free market level will restore optimality this conflicts with generally held views and is contrasted with the stiglitz weiss model it is shown that the assumptions which yield overinvestment support debt as the equilibrium method of finance however under the stiglitz weiss assumptions used to derive an underinvestment result equity is shown to be the equilibrium method of finance

credit rationing something s gotta give equilibrium credit rationing in the sense of stiglitz and weiss is shown to imply that the marginal cost of funds to the borrower is infinite so entrepreneurs have an overwhelming incentive to cut their loans by a dollar and so avoid rationing ways of doing this include scaling down the project decreasing consumption or delaying the project to accumulate more savings credit rationing emerges for indivisible projects only when delay causes sufficient deterioration borrowers then apply for funds at the first opportunity but counterfactually once denied a loan they never reapply conditions for credit rationing are stringent indeed

costly monitoring loan contracts and equilibrium credit rationing this paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts where an equilibrium can exhibit credit rationing borrowers are identical ex ante but some receive loans and others do not in contrast to existing credit rationing theories rationing does not occur here due to inflexible prices adverse selection or moral hazard optimizing behaviour produces a standard debt contract in equilibrium the aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a reexamination of credit rationing in the stiglitz and weiss model we reexamine stiglitz and weiss 1981 credit rationing by simultaneously considering adverse selection and moral hazard if returns of the projects are ranked by first order stochastic dominance neither adverse selection nor moral hazard exists if the projects have equalized expected returns moral hazard does not exist and credit rationing due to adverse selection occurs under extreme conditions if the projects are ranked by second order stochastic dominance ssd adverse selection and moral hazard may coexist logically restoring credit rationing but ssd imposes strict limitations on lenders ability to classify borrowers in general our results do not support significance of credit rationing

promoting entrepreneurship in eastern europe the past decade has seen a revival of entrepreneurship in the modern industrial economies characterized by a wave of enterprise restructuring and of new developments in business and technology in this paper we argue that market transitions of the post socialist economies of eastern europe cannot be successful without similar entrepreneurial restructuring to address the massive structural distortions that still plague the post reform economies the governments of the region must promote entrepreneurship through policies that 1 make use of all possible sources of entrepreneurship including in particular the former state and social sectors and 2 establish a macroeconomic environment and property rights framework conducive to entrepreneurship a successful promotion strategy will need to operate on several fronts by 1 redirecting entrepreneurial activities into legal productive activities 2 increasing the supply and effectiveness of entrepreneurs 3 developing markets for complementary inputs and 4 increasing the demand for entrepreneurship an unsuccessful approach we argue will be one that regards the pre reform small private sector as the only source of entrepreneurship and as the only arena for its productive use

signaling in credit markets in this paper we show that under a variety of alternative assumptions about the private information of loan applicants a competitive market for loans is characterized by screening banks separate out loan risks by offering higher loans at higher interest rates depending on the nature of the informational asymmetry it may be that applicants with less risky projects select larger rather than smaller loans comparative statics implications are also examined in particular we explore the effects of an increase in banks cost of funds on average loan quality

on the possibility of credit rationing in the stiglitz weiss model contrary to what is consistently assumed in the literature the return function cannot be hump shaped in the stiglitz weiss 1981 model this has important consequences for the possible occurrence of credit rationing and redlining with a single class of borrowers banks offer credit in two stages demand possibly exceeds supply in stage one but not in stage two with several observationally distinguishable borrower classes the firms in a borrower class are redlined only under circumstances which imply that they would not get credit in a perfect capital market either die rendite funktion kann im stiglitz weiss 1981 modell nicht so wie das in der literatur durchgangig angenommen wird hugelformig sein das hat wichtige implikationen fur die moglichkeit von kreditrationierung einerseits und fur die moglichkeit des ausschlusses ganzer kreditnehmergruppen vom kapitalmarkt andererseits mit nur einer klasse von kreditnehmern erfolgt die kreditvergabe in zwei stufen wahrend auf der ersten stufe eine ubernachfrage vorliegen kann herrscht auf der zweiten stufe marktraumung bei mehreren unterscheidbaren kreditnehmerklassen wird eine klasse nur unter den bedingungen vom kreditmarkt ausgeschlossen bei deren vorliegen sie auch in einem vollkommenen kreditmarkt keinen kredit erhalten wurde

entrepreneurial intentions in the third age the impact of perceived age norms this article investigates the impact of perceived age norms on the formation of entrepreneurial intentions in the third age age norms refer to those social norms that determine whether establishing and running a business are considered appropriate behavior for a mature individual an empirical analysis of finnish individuals finds that norms perceived as permissive of enterprising activity in the third age exert a significant positive influence on entrepreneurial intentions in this segment even when controlling for the general level of entrepreneurship in the municipalities this influence is partially mediated by whether the individual has a positive attitude toward entrepreneurship by how the individual perceives their own ability to start and run a business by the extent of support from their family and friends they perceive and by the importance of that support to them thus if policy aims to increase enterprising activity in the third age segment the portfolio of instruments should include measures that address people s general awareness of third age entrepreneurship as a viable positive and attractive late career option

on the use of collateral this paper surveys existing explanations for the pervasive use of collateral in credit markets and relates them to the empirical evidence on the subject collateral may be used as a screening or an incentive device in markets characterized by various forms of asymmetric and biased information the evidence is incompatible with the use of collateral as a signal of projects quality while broadly consistent with explanations based on its incentive properties and asymmetric evaluation of projects copyright 2000 by blackwell publishers ltd

personality characteristics of self employed an empirical study this paper is concerned with the personality characteristics of self employed most existing studies on personality characteristics of entrepreneurs concentrate on factors like age educational profile and motivations to become self employed there is a lack of significant empirical findings to claim that entrepreneurs are psychologically different from the general population based on a large sample of 14 846 individuals we compare self employed with the general population and with wage and salary earners we empirically show that entrepreneurs differ from the general population and wage and salary earners in a number of characteristics entrepreneurs are more individually oriented than the rest of the population individual responsibility and effort are distinguishing characteristics when asked about important qualities that children can be encouraged to learn at home entrepreneurs answer that it is important to teach children an ethic of working hard except for the latter characteristic the same holds if we compare self employed with wage and salary earners

the distinctiveness of entrepreneurship in transition economies this paper is concerned with the distinctiveness of entrepreneurship and small business development in countries that are at different stages of transformation to market based economies following a discussion of the potential relevance of selected conceptualisations of entrepreneurship to transition conditions the authors present original empirical data referring to the characteristics of entrepreneurs and their businesses from countries at different stages of market reform distinctive features of entrepreneurial behaviour identified reflect the unstable and hostile nature of the external environment and the scarcity of key resources particularly capital in an unstable and weakly structured environment informal networks often play a key role in helping entrepreneurs to mobilise resources win orders and cope with the constraints imposed by highly bureaucratic structures and often unfriendly officials moreover the social context inherited from the former socialist period appears to affect both the attitudes and behaviour of entrepreneurs and the attitudes of society at large towards entrepreneurship

default and renegotiation a dynamic model of debt we analyze the role of debt in persuading an entrepreneur to pay out cash e ows rather than to divertthem in the e rstpartof the paper we study the optimal debt contract specie cally the trade off between the size of the loan and the repayment under the assumption that some debt contract is optimal in the second part we consider a more general class of nondebt contracts and derive sufficient conditions for debt to be optimal among these