Occupational Choice and the Private Equity Premium Puzzle

Hintermaier, Thomas and Steinberger, Thomas (October 2002) Occupational Choice and the Private Equity Premium Puzzle. IHS Economics Series 122

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Abstract: This paper suggests a solution to what has become known as the "private equity premium puzzle" (Moskowitz and Vissing-Jorgensen (2002)). We interpret occupational choice as a dynamic portfolio choice problem of a life-cycle investor facinga liquidity constraint and imperfect information about the profitability of potential businesses. In this setting, becoming an entrepreneur is equivalent to investing in non-traded private equity capital subject to transaction costs. We model the return on private equity as the sum of two components, the individual ability of the entrepreneur and idiosyncratic business risk. Information is imperfect, because only entrepreneurs observe their own business risk realizations. Using numerical techniques we find that the model generates the observed return structure for private equity using standard CRRA-preferences and fully rational expectations.;

Item Type: IHS Series
Keywords: 'Portfolio choice' 'Life-cycle models' 'Private equity'
Classification Codes (e.g. JEL): G11, D91
Status: Published
Date Deposited: 26 Sep 2014 10:37
Last Modified: 22 Jul 2017 02:11
URI: http://irihs.ihs.ac.at/id/eprint/1455

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