I. Introduction; Figures; 1. Mean over 41 growth acceleration episodes between 1960 and 2008; A. Related literature; II. The model; B. Workers; C. Entrepreneurs; D. Competitive equilibrium; E. Policy functions; 2. Policy functions under uninsurable entrepreneurial risk; III. Aggregate dynamics; A. Calibration and structural estimation; Tables; 1. Model parameters; B. Benchmark simulation; 3. Economy dynamics following the opening to entrepreneurship; C. Sensitivity analysis; 4. Economy dynamics under a lower farming income; IV. Financial development; A. Dynamics under risk sharing
2. Sensitivity analysis5. Entrepreneur's investment function with and without state-contingent claims; 6. Economy dynamics with different degree of risk sharing; B. Welfare gains from risk sharing; 7. Welfare gains from risk sharing at the beginning of the transition period; V. Conclusion; 8. Welfare gains from risk sharing at the final equilibrium with entrepreneurship; References; Appendices; I. Growth acceleration episodes; II. Numerical solution; III. Limited legal enforcement
Summary
This paper shows that the behavior of entrepreneurs facing incomplete financial markets and risky investment can explain why growth accelerations in developing countries tend to be associated with current account improvements. The uninsurable risk of losing invested capital forces entrepreneurs to rely on self-financing, so that when business opportunities open up entrepreneurs increase saving to finance the investment that produces growth. The key insight is that saving has to rise more than investment to allow also for the accumulation of precautionary assets. Plausibly calibrated simulations show that this net saving increase can sustain large and persistent net capital outflows
