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Outside (option) in the orchard: lemons or peaches?

Author

Listed:
  • Christian Pietro

    (University of Naples Parthenope and CELPE)

  • Marco Maria Sorge

    (University of Salerno, University of Göttingen and CSEF)

Abstract

We study how an employment-related outside option affects equilibrium properties of credit markets plagued with asymmetric information, when returns to entrepreneurial ventures are ranked by first-order stochastic dominance. While greater separation of expected payoffs in paid employment than in entrepreneurship may involve credit rationing or market breakdown, a lemons problem in the outside option may produce multiple competitive equilibria, each featuring favorable selection in the credit market. Under these circumstances, informational asymmetries will not prevent high-ability individuals from pursuing entrepreneurship and yet induce more investment than is socially efficient. This prediction is consistent with recent empirical evidence on the relative importance of rationing vis-à-vis over-provision for credit seeking, informationally opaque firms.

Suggested Citation

  • Christian Pietro & Marco Maria Sorge, 2018. "Outside (option) in the orchard: lemons or peaches?," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 45(4), pages 555-564, December.
    • Handle: RePEc:spr:epolin:v:45:y:2018:i:4:d:10.1007_s40812-018-0099-8
    DOI: 10.1007/s40812-018-0099-8
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    References listed on IDEAS

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    More about this item

    Keywords

    Occupational choice; Entrepreneurship; Credit markets; Asymmetric information;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G2 - Financial Economics - - Financial Institutions and Services

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