Asymmetric Information and Entrepreneurship

77 Pages Posted: 21 Apr 2015 Last revised: 24 Dec 2019

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: December 24, 2019


Why do individuals become entrepreneurs? We argue that information asymmetries and the quest to maximize pecuniary returns produce entrepreneurs. In our model, individuals signal their hidden ability to employers (e.g., via educational qualifications). However, signals are imperfect and individuals with greater ability than their signals convey to employers become entrepreneurs. Empirical analysis of two longitudinal samples of U.S. and U.K. residents 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 employees' with similar signals.

Keywords: entrepreneurship, employment, occupational choice

JEL Classification: L26, J24

Suggested Citation

Hegde, Deepak and Tumlinson, Justin, Asymmetric Information and Entrepreneurship (December 24, 2019). 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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