de Meza, David and Webb, David C. (1999) Wealth, enterprise and credit policy. Economic Journal, 109 (455). pp. 153-163. ISSN 0013-0133
Abstract
Empirical evidence suggests that capital-market constraints prevent low-wealth individuals from setting up in business. This paper shows this finding to be consistent with socially excessive lending and an interest-rate tax being welfare-improving. One feature of the model, banks' inability to identify entrepreneurial quality, leads to excessive bank lending and investment in low-return projects. The reduction in the probability of bankruptcy lowers the cost of borrowing and eliminates deadweight costs and hence promotes entry. If the incentive effects are sufficiently large, wealth and the volume of entrepreneurial activity move together. A key result of the paper is to show that a market equilibrium in which there is a positive relationship between entry and the level of wealth is consistent with either subsidies to inactivity or taxes on interest raising welfare.
| Item Type: | Article |
|---|---|
| Official URL: | http://www.blackwellpublishing.com/journal.asp?ref... |
| Additional Information: | © 1999 The Royal Economic Society |
| Library of Congress subject classification: | H Social Sciences > HB Economic Theory |
| Sets: | Research centres and groups > Managerial Economics and Strategy Group Departments > Finance Departments > Management Research centres and groups > Financial Markets Group (FMG) Collections > Economists Online |
| Date Deposited: | 09 May 2011 13:24 |
| URL: | http://eprints.lse.ac.uk/35876/ |
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