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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].
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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 

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