A Rationale for Government Lending to Entrepreneurial Start-Ups

Abstract

In this chapter, we discuss government (or government-sponsored) lending to entrepreneurial start-ups. The rationale for financial aid from the government follows from binding wealth constraints of entrepreneurs who try to establish their own companies. Because entrepreneurs can hide cash flows and thus cannot credibly commit to paying out more cash than is needed to keep the outsider invested in the firm, entrepreneurs might face a binding financing constraint. If the constraint is binding for projects with a positive net present value, there is underinvestment—a market failure. The government can correct this market failure by offering entrepreneurs renegotiation-proof debt contracts.

Herr Schmid habilitierte sich 1996 an der Universität Lüneburg, wo er im Jahr 2002 zum außerplanmäßigen Professor ernannt wurde. Im Wintersemester 2002/03 vertrat er an der Johann Wolfgang Goethe-Universität Frankfurt die finanzwirtschaftliche Professur von Jan Pieter Krahnen.