Seminar: Tuomas Takalo, The Bank of Finland.

Title: Entreprepeneurship, financiership and selection.

Abstract:

We develop an equilibrium model of the market for entrepreneurial finance where all agents are endowed with some wealth and a project whose quality is their private information. All agents are capital constrained and need to choose whether to invest as entrepreneurs or financiers, or not to invest. We compare this economy to one where finance comes from the outside. Removing outside investors tends to improve efficiency by raising the cost of capital and creating advantageous selection where the agents with productive projects become entrepreneurs and those with unproductive ones become their financiers. If funding is easier to come by, entrepreneurship becomes attractive also for unproductive agents. Financial liberalization may therefore have harmful efficiency effects due to adverse selection. In our model insufficient wealth generally holds back business creation, but the markets for entrepreneurial finance can nonetheless exhibit too much activity.