This paper focuses on the quality of entrepreneurs when individuals, who differ in terms of entrepreneurial ability and wealth, choose between entrepreneurship and wage-earning. A loan is required to become an entrepreneur. Four wealth classes form endogenously. Banks' inability to identify the ability of individuals leads them to offer pooling contracts to the poor and the lower-middle classes. Regardless of ability, all poor class individuals become workers and all lower-middle class individuals become entrepreneurs. Banks are able to offer separating contracts to the upper-middle and the rich classes. High-ability individuals in these wealth classes become entrepreneurs and their low-ability counterparts become workers. Equilibrium contracts may entail cross-subsidies within or between occupations. In some economies, a small success tax on entrepreneurs used to subsidize workers can increase the average quality of entrepreneurs and welfare by changing the thresholds of the wealth classes. In some others a reverse policy is required. Since the aggregate level of investment is fixed, the reason for these policies is not under- or overinvestment by entrepreneurs, as it often is in previous literature.
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Length: 42 pages Date of creation: 02 May 2007 Date of revision: Handle: RePEc:boc:bocoec:666
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Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
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Mookherjee, Dilip & Ray, Debraj, 2002.
"Persistent Inequality,"
Discussion Paper
57, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
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