Entrepreneurship in Equilibrium

40 Pages Posted: 13 Jun 2002 Last revised: 27 Oct 2010

See all articles by Denis Gromb

Denis Gromb

HEC Paris

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2002

Abstract

This paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. By contrast, failed entrepreneurs must seek other jobs in an imperfectly informed external labor market. While this external labor market leads to ex post inefficient allocations, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low entrepreneurship equilibrium, the market for failed entrepreneurs is thin, making internal labor markets and intrapreneurship particularly valuable. In a high entrepreneurship equilibrium, the active labor market reduces the value of internal labor markets and encourages entrepreneurship. We also show that there can be too little or too much entrepreneurial activity. There can be too little because entrepreneurs do not take into account their positive effect on the quality of the labor market. There can be too much because a high quality labor market is bad for entrepreneurial incentives.

Suggested Citation

Gromb, Denis and Scharfstein, David S., Entrepreneurship in Equilibrium (June 2002). NBER Working Paper No. w9001. Available at SSRN: https://ssrn.com/abstract=315998

Denis Gromb

HEC Paris

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

David S. Scharfstein (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-496-5067 (Phone)
617-496-8443 (Fax)

HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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