Keeping Options Open: What Motivates Entrepreneurs? [Job Market Paper]
Abstract: To study the motivations of entrepreneurs, I develop a life-cycle model in which risk-averse individuals can become entrepreneurs and possibly return later to paid employment. While they are entrepreneurs, individuals learn about the productivity of their firm and enjoy nonpecuniary benefits. I estimate the model using detailed French administrative data which allow me to follow transitions in and out of entrepreneurship and to match entrepreneurs’ employment records with their firm’s accounting data. My main findings are as follow. First, estimated nonpecuniary benefits represent 6,700€ per year (some 15% of profits) and sum up to 74,000€ over the average entrepreneurial spell. Second, despite being small, nonpecuniary benefits are critical to entrepreneurship: without them, the number of firm creations would be cut by 16% and exit rates would increase so that overall the number of entrepreneurial firms would be 31% smaller. Third, the option to return to paid employment is worth 82,000€ to new entrepreneurs. This option is equally important for entrepreneurship: it explains 19% of firm creations on its own, and 45% together with nonpecuniary benefits. Finally, entrepreneurs face large permanent productivity shocks, which generate substantial option value and drive the evolution of the firm size distribution.
Quantifying Reduced-Form Evidence on Collateral Constraints
Abstract: While a mature literature shows that credit constraints causally affect firm-level investment, this literature provides little guidance to quantify the economic effects implied by these findings. Our paper attempts to fill this gap in two ways. First, we use a structural model of firm dynamics with collateral constraints, and estimate the model to match the firm-level sensitivity of investment to collateral values. We estimate that firms can only pledge about 19% of their collateral value. Second, we embed this model in a general equilibrium framework and estimate that, relative to first-best, collateral constraints are responsible for 11% output losses.
Countercyclical Income Risk and Portfolio Choices over the Life-Cycle
Abstract: I structurally estimate a life-cycle model of portfolio choices that incorporates the correlation between stock market returns and the cross-sectional skewness of idiosyncratic labor income shocks. The fact that skewness is cyclical can explain (i) why young households with modest financial wealth do not participate in the stock market and (ii) why, conditional on participation, the share of financial wealth invested in equity slightly increases with age until retirement. With an estimated relative risk aversion of 5 and yearly participation cost of $290, the model matches the life-cycle profiles of wealth, of stock market participation, and of the conditional equity share observed among US households. Without cyclical skewness, estimated participation costs exceed $1,000 per year and the model generates a counterfactual decline of the conditional equity shares over the life-cycle. Overall, cyclical skewness reduces aggregate demand for equity by 15%.
A Certainty Equivalent Valuation of Social Security Entitlements
Abstract: This paper studies how US households should value Social Security entitlements. To do so, I set up a continuous time life-cycle model in which the stock and labor markets are cointegrated and Social Security benefits are wage-indexed. Then, I use data from the Survey of Consumer Finances to calibrate relative risk aversion by matching the evolution of equity holdings over the life-cycle. First, I find that the certainty equivalent of Social Security for working households is 46% lower than the sum of future cash flows discounted at the risk-free rate and negative for young households. Second, at the national scale, and taking into account retirees, the risk-adjusted value of Social Security entitlements is 19.6 trillion dollars, which is 37% lower than the unadjusted value of 31 trillion dollars. My findings suggest that the present value of pension entitlements and the transition cost to a funded system may be largely overestimated.