Secured and unsecured loans in the financing activities of an entrepreneur

摘要

This paper considers an entrepreneur who potentially sets up a monopolistic firm but faces the risk of a demand shock. The entrepreneur has two possible choices for financing: he can use the capital good component of his production as collateral for a low interest secured loan or he can obtain funds through an unsecured loan that does not require collateral but charges a high interest rate. Through his cost minimization problem, the choice of financial contracts determines the marginal costs of production and the inputs of factors of production. The entrepreneur’s choice of financial loan, therefore, has a significant effect on the output market and may be detrimental to social welfare in some cases.