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Financial trading versus entrepreneurship: Competition for talent and negative feedback effects

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  • Arnold, Lutz G.
  • Zelzner, Sebastian

Abstract

Higher market efficiency due to informed financial trading is typically considered to have positive feedback effects on the real economy. We extend the seminal Grossman-Stiglitz (1980) model to highlight an important negative feedback effect from trading to entrepreneurial activity: information revelation via prices leads to a clustering of risk at entrepreneurs. This distorts agents’ occupational choice between financial trading and entrepreneurship, discouraging real economic activity. This negative feedback effect provides explanations for excessive financial trading and multiplicity of equilibria.

Suggested Citation

  • Arnold, Lutz G. & Zelzner, Sebastian, 2022. "Financial trading versus entrepreneurship: Competition for talent and negative feedback effects," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 186-199.
    • Handle: RePEc:eee:quaeco:v:86:y:2022:i:c:p:186-199
    DOI: 10.1016/j.qref.2022.07.001
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    More about this item

    Keywords

    Market efficiency; Asymmetric information; Allocation of talent; Occupational choice; Feedback effects;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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