Entrepreneurial learning and the existence of credit markets

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jebo.2004.12.005 Byline: Simon C. Parker Keywords: Learning by doing; Credit markets Abstract: I explore the economic implications of learning by doing by borrower entrepreneurs who are initially imperfectly informed about their innate abilities. It is shown how entrepreneurial learning worsens the adverse effects of moral hazard, causing the possible disappearance of otherwise viable credit markets and thereby decreasing social welfare. The reason is that learning reduces subjective uncertainty about risky future outcomes, thus encouraging excessive risk-taking behaviour. Author Affiliation: School of Economics, Finance & Business, University of Durham, 23-26 Old Elvet, Durham DH1 3HY, UK Article History: Received 10 April 2002; Revised 18 October 2004; Accepted 10 December 2004