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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Small Business Economics Springer Journals

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

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1999 by Kluwer Academic Publishers
Subject
Business and Management; Management; Microeconomics; Entrepreneurship; Industrial Organization
ISSN
0921-898X
eISSN
1573-0913
D.O.I.
10.1023/A:1008064210706
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Small Business EconomicsSpringer Journals

Published: Sep 30, 2004

References

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