particular; the ratecfreward cfunski Iledworters isw, and the ratecfretuιrn
Cfskilled Iabcuris w + ±h, where±h is asortcf colIege premium.
Each agentis endcwed with an entrepreneuriaIprcjectand therefcre is a
PCtentiaIentrepreneur. T homcreinO¢dertthoagont the Icwerthecutccme
cfhis prcject. The undertakingcfthe investmentprcjectrequires x units cf
thecutputgccdas inputandcneunitcfIabcur, theentrepreneur’scne.2 The
physicaIcapitaIinvestmenttechncIcgy transfcrms pericd t cutputin pericd
t+1 capitaI. Eachprcjectcutccmeis negativeIyreIatedtctheentrepreneur’s
OvoI cf i n∈C ci ency acccrdi ng to the fol Icwing ecμaticn:
(
kt+1 = K (1 i°o)= i°) fcr h = 0
+ v к K (1 i° + h ) for h = h
TeChnical ineXdency is an entrepreneurial Characteristic; à a B ernanke
eG ertler (19 89 ): the mcre an agent is technical y inel dent; the lcwer the
cutccme cfhis entrepreneurialinvestmentprcject3.
All the prcgenitcrs are all licuidity ccnstrained; that is their wealth is
cwer than the input recqui rementx. T herefore they cannctself... nance thei r
investment prcject and must ask fcr credit. The interest rate cn lcans is
excgencusly given. The grcss interestrate is i . A gents whc dc nctbeccme
entrepreneurs cper thei r labcur endcwment and investthei rsavings in the
capitalmarketgetting a return ecualtc i . Thelending pclicy is acccmmc-
dating since the interestrate is excgencusly.xed by the CentralB ank and
lenders acccmmcdate the demand fcr funds at that rate. This implicitly
means thatthere always exists excess supply cflcanable fund.
Attheend cfthe prcducticn prccess; in pericd t +1; the entrepreneur
sells the capitalgccd atthe relative price q; excgencus and ccnstant. The
grcss return from the invcstmentprcjoct (φ) is therefore
φ = qK(1 i °o)
A ggregate capital prcduced in the eccncmy is used in the prcducticn cf
the cutput gccd. Once the capital gccd is prcduced and scld; entrepre-
neurs/debtcrs must refund the lcan they gct. The entrepreneur’s prc.t is
therefcre
¼t+1 = qK(1 i ° ) i i (x i bt)
2An entrepreneur can be interpreted as a self-emplcyed wcrker à la B anerjee and
N ewman.
3InBernankeeG ertl∈r(19 89 ), themcrean agentis inetdent. the higherthe input
recuirementhe needs in crdertcinvest.