Asymmetric Information and Entrepreneurship

59 Pages Posted: 21 Apr 2015 Last revised: 15 Jun 2017

Deepak Hegde

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

Justin Tumlinson

Loughborough University; Ludwig Maximilian University of Munich

Date Written: May 15, 2017


Why do individuals become entrepreneurs? We develop a model in which individuals signal their unobservable ability to employers (e.g., via educational qualifications). However, signals are imperfect and individuals whose ability is greater than their signals convey to employers choose entrepreneurship. Our empirical analysis of two separate nationally representative longitudinal samples of individuals residing in the U.S. and the U.K. supports the model's predictions that (i) entrepreneurs have higher ability than employees with comparable signals, (ii) employees have better signals than equally able entrepreneurs, and (iii) entrepreneurs' earnings are higher and exhibit greater variance than those of employees with similar signals.

Keywords: entrepreneurship, employment, occupational choice

JEL Classification: L26, J24

Suggested Citation

Hegde, Deepak and Tumlinson, Justin, Asymmetric Information and Entrepreneurship (May 15, 2017). Available at SSRN: or

Deepak Hegde (Contact Author)

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

44 West 4th Street
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 ( email )

Geschwister-Scholl-Platz 1
Munich, Bavaria 80539

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