Risk-Bearing and Entrepreneurship

25 Pages Posted: 26 Jun 2007

See all articles by Andrew F. Newman

Andrew F. Newman

Boston University - Department of Economics

Date Written: January 2007


In the 'Knightian' theory of entrepreneurship, entrepreneurs provide insurance to workers by paying fixed wages and bear all the risk of production. This paper endogenizes entrepreneurial risk by allowing for optimal insurance contracts as well as the occupational self-selection. Moral hazard prevents full insurance; increases in an agent's wealth then entail increases in risk borne. Thus, even under decreasing risk aversion, there are robust instances in which workers are wealthier than entrepreneurs. This empirically implausible result suggests that risk-based explanations for entrepreneurship are inadequate.

Keywords: Moral hazard, occupational choice, principal-agent model

JEL Classification: D2, D8, L2, O16

Suggested Citation

Newman, Andrew F., Risk-Bearing and Entrepreneurship (January 2007). CEPR Discussion Paper No. 6021, Available at SSRN: https://ssrn.com/abstract=996682

Andrew F. Newman (Contact Author)

Boston University - Department of Economics ( email )

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