Entrepreneurial Specialization: How Subjective ('Knightian') Uncertainty Matters

Abstract

Subjective uncertainty helps explain features of entrepreneurial activity that fall outside the scope of models that focus on information asymmetries and misaligned incentives. Uncertainty, construed simply as missing information, can lead to unintended misjudgments. Efforts to control misjudgments affect the matching of projects with their funding. Specifically, self-financed or informally financed entrepreneurs start small simple businesses with high market uncertainties. Conversely, public companies fund large complex projects and control the coordination uncertainties they entail but have low tolerances for market uncertainties. And angel investors and venture capitalists favor businesses with intermediate resource requirements and uncertainties.

Keywords: entrepreneurship, economic methodology, business history, innovation

JEL Classification: B0, M0, O0