The Evans and Jovanovic Equivalence Theorem and Credit Rationing: Another Look

The Evans and Jovanovic Equivalence Theorem and Credit Rationing: Another Look In their well-known paper on liquidity constraints, Evans and Jovanovic (1989), argue that under certain assumptions an equivalence relation exists between the probability of switching from wage- into self-employment and assets of the entrepreneur. That is, if and only if there are liquidity constraints is the probability of switching a function of the individual's assets. The present paper amends this proposition by showing in a simple diagram that if the probability of switching depends on assets then capital constraints are implied in their model; but not vice versa. This apparently trivial correction is shown to have important implications for empirical work. Under some circumstances alternative tests need to be employed to establish the existence or otherwise of credit rationing. One such test is discussed. Small Business Economics Springer Journals

The Evans and Jovanovic Equivalence Theorem and Credit Rationing: Another Look

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Kluwer Academic Publishers
Copyright © 1999 by Kluwer Academic Publishers
Business and Management; Management; Microeconomics; Entrepreneurship; Industrial Organization
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