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Entrepreneurship in equilibrium

Subject

Finance

Publishing details

Authors / Editors

Gromb D;Scharfstein D

Publication Year

2001

Abstract

This paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. Instead, failed entrepreneurs must seek other jobs in an imperfectly informed external labor market. While this is ex-post inefficient, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometime coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external)labor markets are thus particularly valuable, which favors intrapreneurship (entrepreneurship). We also show that there can be too little entrepreneurial activity since entrepreneurs don't take into account the positive effect of their choice of organizational form on the performance of the labor market.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 340

Series

IFA Working Paper

Available on ECCH

No


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