Abstract
The presence of credit constraints can shape the entry, growth, and size distribution of firms. In this paper, I consider the optimal contract between banks and entrepreneurs in an economy in which limitations in the punishments for default induce limitations in the credit available to entrepreneurs. I derive a very simple characterization of the optimal contract at the time of inception of firms and show how this optimal contract shapes the evolution of the size distribution of firms and the aggregate levels of entrepreneurial activity and output.
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The paper benefited from useful comments and suggestions from an anonymous referee and from seminar participants at Duke University, Northwestern University, and University of Western Ontario.
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Monge-Naranjo, A. Entrepreneurship and firm heterogeneity with limited enforcement. Ann Finance 5, 465–494 (2009). https://doi.org/10.1007/s10436-009-0122-1
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DOI: https://doi.org/10.1007/s10436-009-0122-1