Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 1999:18: The Effects of Risk Aversion and Age on Investments in New Firms

Tomas Forsfält
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Tomas Forsfält: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: How does the age of risk-averse individuals affect investments in private projects? This question is analyzed under the assumption that such individuals have to invest a large fraction of their personal wealth in order to establish a new firm. Thresholds conditional on age that trigger a switch from one asset to another are derived in a continuous-time portfolio choice model with zero-or -one choices. As the investor gets older - and depending on random events - not only wealth, but also the thresholds, might increase. Thus, there are two counteracting effects on the likelihood of becoming an entrepreneur.

Keywords: entrepreneurs; portfolio choice; either-or; horizon; risk aversion

JEL-codes: D81; G11

25 pages, November 1, 1999

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