https://macropaperwarehouse.com/authors/denis-gorea/Denis GoreaHugo -- gohugo.ioen-usThu, 01 Jan 2026 00:00:00 +0000https://macropaperwarehouse.com/papers/the-aggregate-costs-of-uninsurable-business-risk/Thu, 01 Jan 2026 00:00:00 +0000https://macropaperwarehouse.com/papers/the-aggregate-costs-of-uninsurable-business-risk/<p><strong>Research question and motivation.</strong> A large literature argues that credit constraints are the dominant financial friction holding private businesses below their optimal scale, so that easing credit access would yield large aggregate efficiency gains. This paper challenges that view. Private businesses are also poorly diversified — their owners bear undiversifiable business-income risk — and the authors argue the macroeconomic costs of this lack of diversification are far larger than those of credit constraints. The crux is that entrepreneurs can limit risk exposure by operating at a smaller scale, so productive-but-poor entrepreneurs choose an inefficiently low scale and are unwilling to borrow to expand. Firm size is thus limited by risk, not by credit availability.</p>