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Capital resale frictions, by increasing liquidity risk and decreasing collateral values,
can depress investment and amplify capital misallocation in the entrepreneur sector. I
provide qualitative evidence using investment data from startups, and quantify these
channels using a calibrated entrepreneurial choice model with production risk, financial
frictions, and capital resale frictions. I decompose the effects coming from production
risk, financial frictions, and resale frictions. I find that resale frictions increase average
excess returns by 2.13 pp, and reduce aggregate productivity by 12.7%. The impact of
resale frictions are substantially larger than financial frictions or production risk.
