Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship
We present and estimate a model where the choice between entrepreneurship and wage
work may be influenced by financial market imperfections. The model allows for limited
liability, as in Evans and Jovanovic (1989), moral hazard, as in Aghion and Bolton (1996),
and a combination of both constraints. The paper uses structural techniques to estimate
the model and identify the source of financial market imperfections using data from
rural and semi-urban households in Thailand. Structural, non-parametric and reduced
form estimates provide independent evidence that the dominant source of credit market
imperfections is moral hazard. We reject the hypothesis that limited liability alone can
explain the data.
