The editor in charge of this paper was Fabrizio Zilibotti.
DOES IDIOSYNCRATIC BUSINESS RISK MATTER FOR GROWTH?
Version of Record online: 12 APR 2013
© 2013 by the European Economic Association
Journal of the European Economic Association
Volume 11, Issue 2, pages 343–368, April 2013
How to Cite
Michelacci, C. and Schivardi, F. (2013), DOES IDIOSYNCRATIC BUSINESS RISK MATTER FOR GROWTH?. Journal of the European Economic Association, 11: 343–368. doi: 10.1111/jeea.12007
Acknowledgments: Both authors are affiliated with CEPR. We are grateful to the editor and three anonymous referees for useful suggestions. We have benefited from the comments of Francesco Caselli, Antonio Ciccone, Gianluca Clementi, Andrew Ellul, Luigi Guiso, Enisse Kharroubi, Thomas Philippon, Mario Padula, and seminar participants at the Universities of Naples, Sassari, Cagliari, and Venice; EIEF, at the CREI-CEPR conference on Finance, Growth, and the Structure of the Economy and at the Bank of Italy conference on Trends in the Italian Productive System. We also thank Diana Nicoletti for helping us with Thomson Datastream. Fabiano Schivardi thanks the European Community’s Seventh Framework Programme (grant agreement n. 216813) for financial support.
- Issue online: 12 APR 2013
- Version of Record online: 12 APR 2013
Several imperfections can prevent entrepreneurs from diversifying away the idiosyncratic risk of their business. As a result idiosyncratic risk discourages entrepreneurial activity and hinders growth, with the effects being stronger in economies with lower risk diversification opportunities. In accordance with this prediction, we find that OECD countries with low levels of risk diversification opportunities (as measured by the relevance of family firms or of widely held companies) perform relatively worse (in terms of productivity, investment, and business creation) in sectors characterized by high idiosyncratic risk. Differently from previous literature, we allow risk to be country specific. Since risk is endogenous to risk diversification opportunities, we instrument its value using sectoral risk in the United States, a country where idiosyncratic business risk can be more easily diversified away. Tackling the endogeneity of risk and recognizing that it varies by country magnifies the estimated effects of risk on growth.