European University Institute and UC3M
Aula Ernest Lluch – 12:00
We propose a parsimonious extension of the Lucas (1978) model that distinguishes between entrepreneurs that are self-employed and those that are employers. This distinction is important for understanding the impact of financial frictions on entrepreneurship, aggregate output and income distribution, and for understanding the political economy of financial frictions. We find that the removal of financial frictions decreases the self-employment rate from 24% to 11% (with small effects on the number of employers), increases aggregate output by 48%, and has non-trivial effects on income distribution. We also find that while most households benefit from this reform, the majority of employers lose.