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Entrepreneurial Innovation

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Author Info
Luca Rigotti (University of California, Berkeley)
Matthew Ryan (Australian National University)
Rema Vaithianathan (Research School of Social Sciences, Australian National University)

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Abstract

This paper presents an equilibrium model in which the process of firm formation and technology adoption is endogenous. Individuals decide whether to work in an existing firm for a posted wage, or to establish a new firm. Entrepreneurs hire a single worker and choose a production technology from a fixed set. The stochastic properties of different technologies are known with different, and exogenously specified, degrees of precision. We use Dempster's (967) lower probabilities to characterize these differences in objective precision of risk information. Individuals in the model are heterogeneous with respect to their tolerance of imprecise risk. This heterogeneity determines which technologies are adopted in equilibrium, the number of firms adopting each active technology, firm structure (risk attitudes of owner and worker), and the wage differentials across firms adopting different technologies. We can also parametrically alter the risk precision associated with a given technology to examine the effect on equilibrium. This comparative static exercise suggests an explanation for the commonly observed S-shaped diffusion profile for successful innovations.

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Paper provided by Department of Economics, Institute for Business and Economic Research, UC Berkeley in its series Department of Economics, Working Paper Series with number 1016.

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Date of creation: 01 Feb 2001
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Handle: RePEc:cdl:econwp:1016

Note: oai:cdlib1:iber/econ-1016
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Related research
Keywords: Occupational Choice; Entrepreneurship; Imprecise Risk; Non-expected Utility; Innovation;

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References listed on IDEAS
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  1. Sujoy Mukerji, 1996. "Understanding the nonadditive probability decision model (*)," Economic Theory, Springer, vol. 9(1), pages 23-46.
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  2. Hart, Oliver D., 1980. "Perfect competition and optimal product differentiation," Journal of Economic Theory, Elsevier, vol. 22(2), pages 279-312, April. [Downloadable!] (restricted)
  3. P. Dubey & J. Geanakoplos & M . Shubik, 2001. "Default and Punishment in General Equilibrium," Department of Economics Working Papers 01-07, Stony Brook University, Department of Economics. [Downloadable!]
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  4. Hendon, Ebbe, et al, 1994. "Expected Utility with Lower Probabilities," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 197-216, March.
  5. Dreze, Jacques H, 1985. "(Uncertainty and) the Firm in General Equilibrium Theory," Economic Journal, Royal Economic Society, vol. 95(380a), pages 1-20, Supplemen.
  6. Richard E. Kihlstrom & Jean-Jacques Laffont, . "A Competitive Entrepreneurial Model of a Stock Market," Rodney L. White Center for Financial Research Working Papers 2-80, Wharton School Rodney L. White Center for Financial Research.
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  7. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May. [Downloadable!] (restricted)
  8. Jaffray, Jean-Yves & Wakker, Peter, 1993. " Decision Making with Belief Functions: Compatibility and Incompatibility with the Sure-Thing Principle," Journal of Risk and Uncertainty, Springer, vol. 7(3), pages 255-71, December.
  9. Makowski, Louis, 1980. "Perfect competition, the profit criterion, and the organization of economic activity," Journal of Economic Theory, Elsevier, vol. 22(2), pages 222-242, April. [Downloadable!] (restricted)
  10. Jensen, Richard, 1982. "Adoption and diffusion of an innovation of uncertain profitability," Journal of Economic Theory, Elsevier, vol. 27(1), pages 182-193, June. [Downloadable!] (restricted)
  11. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August. [Downloadable!] (restricted)
  12. Kelsey, D. & Spanjeres, W., 1997. "Uncertainty in Partnerships," Discussion Papers 97-16, Department of Economics, University of Birmingham.
  13. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1983. "Implicit Labor Contracts and Free Entry," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 55-105, Supplemen. [Downloadable!] (restricted)
  14. Ghirardato, Paolo, 1996. "Coping With Ignorance: Unforeseen Contingencies and Non-Additive Uncertainty," Working Papers 945, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  15. 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 719-48, August. [Downloadable!] (restricted)
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  1. Jim Engle-Warnick & Javier Escobal & Sonia Laszlo, 2007. "Ambiguity Aversion As A Predictor Of Technology Choice: Experimental Evidence From Peru," Departmental Working Papers 2007-04, McGill University, Department of Economics. [Downloadable!]
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  2. Manju Puri & David Robinson, 2005. "Optimism and Economic Choice," NBER Working Papers 11361, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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