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Entrepreneurship, Asymmetric Information, and Unemployment

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  • Robin Boadway
  • Nicolas Marceau
  • Maurice Marchand
  • Marianne Vigneault

Abstract

We examine how three sources of asymmetric information affect the supply of entrepreneurs and unemployment. In the first case, banks cannot observe entrepreneurs' risk of failure so ration credit. This increases the number of entrepreneurs and the level of unemployment. In the second case, firms cannot observe workers' effort so offer a wage above the market clearing one. This results in unemployment and too few entrepreneurs. The final case arises when firms cannot observe workers' abilities. A pooling wage is offered and results in too many entrepreneurs. The role of government in restoring efficiency is explored. Copyright Kluwer Academic Publishers 1998

Suggested Citation

  • Robin Boadway & Nicolas Marceau & Maurice Marchand & Marianne Vigneault, 1998. "Entrepreneurship, Asymmetric Information, and Unemployment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 5(3), pages 307-327, July.
    • Handle: RePEc:kap:itaxpf:v:5:y:1998:i:3:p:307-327
    DOI: 10.1023/A:1008682110911
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    References listed on IDEAS

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    1. Philippe Aghion & Peter Howitt, 1994. "Growth and Unemployment," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 477-494.
    2. BOADWAY, Robin & MARCHAND, Maurice & PESTIEAU, Pierre, 1991. "Optimal linear income taxation in models with occupational choice," LIDAM Reprints CORE 958, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
    4. Besanko, David & Thakor, Anjan V., 1987. "Competitive equilibrium in the credit market under asymmetric information," Journal of Economic Theory, Elsevier, vol. 42(1), pages 167-182, June.
    5. Boadway, Robin & Marchand, Maurice & Pestieau, Pierre, 1991. "Optimal linear income taxation in models with occupational choice," Journal of Public Economics, Elsevier, vol. 46(2), pages 133-162, November.
    6. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
    7. Marc Cowling & Mark Taylor & Peter Mitchell, 2004. "Job Creators," Manchester School, University of Manchester, vol. 72(5), pages 601-617, September.
    8. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:

    1. Ilmakunnas Pekka & Kanniainen Vesa, 2001. "Entrepreneurship, Economic Risks, and Risk Insurance in the Welfare State: Results with OECD Data 1978±93," German Economic Review, De Gruyter, vol. 2(3), pages 195-218, August.
    2. Oana Secrieru & Marianne Vigneault, 2004. "Public Venture Capital and Entrepreneurship," Staff Working Papers 04-10, Bank of Canada.
    3. Mikko Leppämäki & Vesa Kanniainen, 2000. "Entrepreneurship in a Unionised Economy," CESifo Working Paper Series 379, CESifo.
    4. Kar, Saibal & Mukherjee, Vivekananda, 2006. "Entrepreneurial culture, occupational choice and tax policy," MPRA Paper 24104, University Library of Munich, Germany.
    5. Keuschnigg, Christian & Nielsen, Soren Bo, 2003. "Tax policy, venture capital, and entrepreneurship," Journal of Public Economics, Elsevier, vol. 87(1), pages 175-203, January.
    6. Hamid Beladi & Saibal Kar, 2015. "Skilled and Unskilled Immigrants and Entrepreneurship in a Developed Country," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 666-682, August.
    7. Hamid Beladi & Saibal Kar, 2014. "Unemployment Benefits and Entrepreneurship," The Japanese Economic Review, Japanese Economic Association, vol. 65(1), pages 122-128, March.
    8. Robin Boadway & Jean-François Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series 877, CESifo.
    9. Kar, Saibal, 2009. "International labor migration, asymmetric information and occupational choice," MPRA Paper 24106, University Library of Munich, Germany.
    10. Robin Boadway & Michael Keen, 2004. "Financing New Investments Under Asymmetric Information: A General Approach," Working Paper 1017, Economics Department, Queen's University.
    11. Jean-François Tremblay, 2009. "Business Taxation and Venture-Capital-Financed Innovation," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 65(2), pages 141-161, June.
    12. Mirjam van Praag, 2003. "Initial Capital Constraints Hinder Entrepreneurial Venture Performance: An empirical analysis," CESifo Working Paper Series 887, CESifo.
    13. Robin Boadway & Michael Keen, 2006. "Financing and Taxing New Firms under Asymmetric Information," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(4), pages 471-502, December.

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    More about this item

    Keywords

    Entrepreneurship; unemployment; occupational choice;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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