• The editor in charge of this paper was Fabrizio Zilibotti.

  • 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.

E-mail: (Michelacci); (Schivardi)


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.