Information Frictions and Entrepreneurship

79 Pages Posted: 21 Apr 2015 Last revised: 27 Jul 2020

See all articles by Deepak Hegde

Deepak Hegde

New York University (NYU) - Leonard N. Stern School of Business

Justin Tumlinson

Loughborough University; Ludwig Maximilian University of Munich (LMU)

Date Written: July 25, 2020


Why do individuals become entrepreneurs? Why do some succeed? We propose two theories in which information frictions play a central role in answering these questions. Empirical analysis of two national longitudinal samples reveal the following patterns: (i) entrepreneurs have higher ability than employees with comparable education, (ii) employees have better education than equally able entrepreneurs, and (iii) entrepreneurs' earnings are higher and exhibit greater variance than employees with similar education. These, and other empirical tests support our asymmetric information theory of entrepreneurship that when information frictions cause firms to undervalue workers lacking traditional credentials, workers' quest to maximize their private returns drives the most able into successful entrepreneurship.

Keywords: Entrepreneurship; Asymmetric Information; Signaling; Education; Job-matching

JEL Classification: L26, J24

Suggested Citation

Hegde, Deepak and Tumlinson, Justin, Information Frictions and Entrepreneurship (July 25, 2020). Available at SSRN: or

Deepak Hegde (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Justin Tumlinson

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain
+44 (0) 2038051339 (Phone)

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539

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