Entrepreneurship, Financiership, and Selection

Abstract:     
We develop an equilibrium model of the market for entrepreneurial finance, in which all agents have some personal wealth and a project whose quality is their private information. All agents choose whether to invest either as entrepreneurs or financiers, or to invest in storage technology. We find that a binding economy‐level wealth constraint, which renders credit scarce, can create advantageous selection, where productive agents become entrepreneurs and unproductive agents become their financiers. If funding is easier to obtain, entrepreneurship also attracts unproductive agents. In our model, individual wealth and entrepreneurship are positively (negatively) correlated if financial market participation is complete (incomplete).

Number of Pages in PDF File: 28

Keywords: Asymmetric information, credit constraints, entrepreneurial finance, financial market efficiency, start‐up creation

JEL Classification: D53, D82, G14, G30, L26

Accepted Paper Series