Entrepreneurs in BGG model (1999)

Hi everyone,

May I ask how to introduce government bond investment in the entrepreneurial sector of BGG model (1999)?
specifically, entrepreneurs in addition to purchasing physical capital for production activities, but also financial investment activities, such as buying government bonds.

That is not straightforward to do as it would imply a portfolio choice problem.

Yeah, I think it’s really hard. Prof Pfeifer, I want to set up enterprise financialization in DSGE model, do you have any good suggestions?

In fact, in the original BGG setup, entrepreneurs ‘have’ that choice. But, Gale and Hellwig (83?) show that the optimal contract involves entrepreneurs pledging all their net worth to capital investment so it’s not used in equilibrium. In macro models, we don’t derive the optimal contract but basically assume Gale Hellwig result applies. What you are suggesting involves deriving optimal contract in different setups (like aggregate shocks etc)

1 Like