Entrepreneurship in equilibrium

Finance

IFA Working Paper

2001

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.

Institute of Finance and Accounting

FIN 340

IFA Working Paper

No