The prevalence of market failures can be regarded as having both a limiting as well as enhancing effect on entrepreneurship. First, the malfunction of markets relevant to the formation of a firm complicates or even impedes its implementation. Second, the elimination of market failures constitutes opportunities for entrepreneurs to create social value. In this dissertation we investigate optimal market failure correction from both the private and governmental perspective. More specifically, we theoretically analyze the optimal allocation of external funds by social entrepreneurs aiming at alleviating poverty, on the one hand, and federal lending programs aiming at securing credit accessibility for innovative start-ups, on the other hand. To this date, both issues have been insufficiently analyzed in the literature. Our main criticism is that the postulated objectives of actors show substantial conceptual weaknesses and often fail to reflect empirical evidence. Moreover, there is a gap of theoretical work which analyzes optimal federal lending in the presence of information spillovers. We consider two models of nonprofit entrepreneurial behaviour. In both models, the social entrepreneur observes a number of differently poor individuals who are unable to satisfy a basic human need. The entrepreneur plans to allocate a social good but is restricted by an exogenously given amount of third-party funds. Hence, she is unable to serve all applying individuals and must ration them. Furthermore, we characterize the social entrepreneur as an inequity-averse decision maker. We thereby build on recent experimental economic research which investigates general social preferences by means of simple distribution games. In the first model, the entrepreneur rations individuals by non-price allocation mechanisms and by charging a uniform user fee for the social good. Within our theoretical framework, we formally prove the existence of corner and interior solutions. Moreover, we find ambiguous reactions of the entrepreneur to a cut in donations. Given a sufficiently low level of status quo donations, entrepreneurs with relatively high inequity aversion tend to increase the project volume, in contrast to entrepreneurs with relatively low aversion. In the second model, we modify two assumptions. The entrepreneur now also decides on the quality of the social good and perfectly price discriminates recipients. We find that less inequity-averse entrepreneurs prefer to serve wealthier individuals at high reference quality. In contrast, more inequity-averse entrepreneurs care for the poorest individuals but offer minimum quality. Furthermore, as input costs increase, entrepreneurs with low inequity aversion change the target group, while entrepreneurs with high aversion do not. Finally, we change our perspective and analyze optimal governmental intervention in credit markets while presuming positive externalities and symmetrically informed market participants. For common objectives of governmental lending institutions we verify that optimal lending structures require the application of the gap lender principle. We also show that lending programs can never be self-financing, due to the positive subsidy margin. Within this general framework, we contrast the policies of the US Small Business Administration and the German KfW Mittelstandsbank and show that neither institution features an optimal lending structure.
Social Entrepreneur, Federal Lending Program, Inequity Aversion, Gap-Lending Principle, Self-Financing, Allocation