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  5. The Aggregate Costs of Uninsurable Business Risk

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

The Aggregate Costs of Uninsurable Business Risk

  • Corina Boar
  • Denis Gorea
  • Virgiliu Midrigan
American Economic Review (Forthcoming)

Abstract

We use firm-level data to document that private businesses experience large fluctuations in their profit shares. These are due to large, fat-tailed and transitory changes in output that are not fully accompanied by changes in their inputs. We interpret this evidence using a model of entrepreneurial dynamics. Because firms can limit their exposure to risk by operating at a smaller scale, our model predicts large macroeconomic losses from uninsurable business risk, much larger than those stemming from credit constraints. While self-financing allows entrepreneurs to quickly overcome credit constraints, even wealthy entrepreneurs remain considerably exposed to risk.

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