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Occupational Choice and the Quality of Entrepreneurs

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  • Eren Inci

    ()
    (Boston College)

Abstract

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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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 666.

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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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Keywords: adverse selection; entrepreneurship; general equilibrium contract theory; moral hazard; occupational choice; success tax; wage subsidy;

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References

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Citations

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Cited by:
  1. Vera Rocha & Anabela Carneiro & Celeste Amorim Varum, 2013. "Serial entrepreneurship, learning by doing and self-selection," CEF.UP Working Papers 1312, Universidade do Porto, Faculdade de Economia do Porto.
  2. Mehmet Bac & Eren Inci, 2010. "The Old‐Boy Network and the Quality of Entrepreneurs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(4), pages 889-918, December.
  3. Inci, Eren, 2006. "Success breeds success locally: a tale of incubator firms," ZEW Discussion Papers 06-71, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  4. Inci, Eren & Parker, Simon C., 2012. "Financing Entrepreneurship and the Old-Boy Network," IZA Discussion Papers 6288, Institute for the Study of Labor (IZA).
  5. Tuomas Takalo & Otto Toivanen, 2012. "Entrepreneurship, Financiership, and Selection," Scandinavian Journal of Economics, Wiley Blackwell, vol. 114(2), pages 601-628, 06.

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