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Irrational Exuberance, Entrepreneurial Finance and Public Policy

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Abstract

Unrealistic optimism is a well documented phenomenon. This paper argues that it is important in many economic contexts. Focusing on start-up finance for businesses, optimism may be responsible for or consistent with features such as credit rationing or redlining that are normally taken as symptoms of under-provision of finance requiring intervention to expand lending. Optimism leads to the opposite conclusion, at least if it is legitimate to use fiscal policy to counteract systematic error. The paper reports on an experiment in which, due to optimism, the lower the prizes to entrepreneurial activity the higher the subject's expected income.

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Authors and Affiliations

  1. Interdisciplinary Institute of Management, London School of Economics, London, WC2A 2AE, UK

    Marta Coelho, David de Meza & Diane Reyniers

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  1. Marta Coelho
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  2. David de Meza
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  3. Diane Reyniers
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Coelho, M., de Meza, D. & Reyniers, D. Irrational Exuberance, Entrepreneurial Finance and Public Policy. International Tax and Public Finance 11, 391–417 (2004). https://doi.org/10.1023/B:ITAX.0000033985.96539.65

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