Abstract
We model entrepreneurial finance in a search-theoretic framework with endogenous firm entry and exit. Entrepreneurs fund risky investments using a combination of savings, credit cards, bank loans, and home equity loans. The banking sector is over-the-counter, where bargaining determines the pass-through from the nominal interest rate to the bank lending rate, relating the transmission channel of monetary policy to output risk, financial frictions, and the housing market. Firm entry and exit generate heterogeneity in two dimensions: firm age and firm size. At a given nominal interest rate, new (mature) entrepreneurs finance a smaller (larger) share of investments internally and are more (less) liquidity constrained. A calibration to the U.S. between 2000–2016 complements the theoretical results and identifies the entry margin as a key driver in the transmission of monetary policy to aggregate output.
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