Entrepreneurship in Equilibrium

Posted: 24 Nov 2009

See all articles by Denis Gromb

Denis Gromb

HEC Paris

David Scharfstein

affiliation not provided to SSRN

Date Written: 2002

Abstract

A basic model of the choice between entrepreneurship(particularly start-ups) and "intrapreneurship" (business venturing byestablished companies) highlights the key distinction between the two types ofbusiness creation: because internal ventures are funded by firms with relatedprojects, failed intrapreneurs can be redeployed by their firms into otherjobs, while failed entrepreneurs are left to seek employment elsewhere or tostart other new ventures.This model of the choice of organizational formis combined with a model of the labor market to generate an equilibrium modelof entrepreneurial activity.Although no one wants to hire a failedintrapreneur, failed entrepreneurs do not carry such a stigma.When thereis a lot of entrepreneurial activity, there is a large supply of competent,failed entrepreneurs.The entrepreneurial form of organization, then, isthe more attractive form. This reasoning suggests that there can be multiple equilibria.Whenlevels of entrepreneurial activity are low, it pays to set up anintrapreneurial firm (including multiple related projects to which managers canbe redeployed if they fail) because it is hard to find qualified managers inthe external labor market.When entrepreneurial activity levels are high,however, it pays to choose the entrepreneurial form because it is easy to findcompetent managers.The model also illustrates the fact that there can betoo much or too little entrepreneurial activity.Too little activity isthe result of entrepreneurs' tendency to underestimate their positive effect onthe labor market.Too much activity takes place because a strong labormarket offers few incentives to entrepreneurs.(SAA)

Keywords: Labor markets, Corporate ventures, Startups, Organizational structures, Intrapreneurs, Organizational development

Suggested Citation

Gromb, Denis and Scharfstein, David, Entrepreneurship in Equilibrium (2002). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1510596

Denis Gromb (Contact Author)

HEC Paris

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

David Scharfstein

affiliation not provided to SSRN

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