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Entrepreneurship in Equilibrium

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Author Info
Gromb, Denis
Scharfstein, David

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Abstract

This Paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. Instead, failed entrepreneurs must seek other jobs in an imperfectly informed external labour market. While this is ex-post inefficient, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external) labour markets are thus particularly valuable, which favours intrapreneurship (entrepreneurship). We also characterize conditions under which there can be too little or too much entrepreneurial activity in equilibrium.

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Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3652.

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Date of creation: Oct 2002
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Handle: RePEc:cpr:ceprdp:3652

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Related research
Keywords: entrepreneurship; incentives; venture capital;

Other versions of this item:

Find related papers by JEL classification:
D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Grossman, Sanford J & Hart, Oliver D, 1986. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 691-719, August. [Downloadable!] (restricted)
    Other versions:
  2. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-89, December. [Downloadable!] (restricted)
  3. Dewatripont, Mathias, 1988. "Commitment through Renegotiation-Proof Contracts with Third Parties," Review of Economic Studies, Blackwell Publishing, vol. 55(3), pages 377-89, July. [Downloadable!] (restricted)
  4. Cremer, Jacques, 1995. "Arm's Length Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 275-95, May. [Downloadable!] (restricted)
  5. Dewatripont, M & Maskin, E, 1995. "Credit and Efficiency in Centralized and Decentralized Economies," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 541-55, October. [Downloadable!] (restricted)
  6. Robert H. Gertner & David S. Scharfstein & Jeremy C. Stein, 1994. "Internal versus External Capital Markets," NBER Working Papers 4776, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Thomas Hellmann, 1998. "The Allocation of Control Rights in Venture Capital Contracts," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 57-76, Spring. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Axel Gautier & Florian Heider, 2002. "The Benefit and Cost of Winner Picking: Redistribution Vs Incentives," Bonn Econ Discussion Papers bgse31_2002, University of Bonn, Germany. [Downloadable!]
  2. Chemla, Gilles & de Bettignies, Jean-Etienne, 2003. "Corporate Venture Capital: The Upside of Failure and Competition for Talent," CEPR Discussion Papers 4139, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Christian Keuschnigg, 2003. "Optimal Public Policy For Venture Capital Backed Innovation," University of St. Gallen Department of Economics working paper series 2003 2003-09, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  4. Patricia Crifo & Hind Sami, 2008. "Entrepreneurship, technological change and endogenous returns to ability," Post-Print hal-00243037_v1, HAL. [Downloadable!]
  5. Christian Keuschnigg, 2003. "Public Policy and Venture Capital Backed Innovation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  6. Zsuzsanna Fluck & Kedran Garrison & Stewart C. Myers, 2005. "Venture Capital Contracting and Syndication: An Experiment in Computational Corporate Finance," NBER Working Papers 11624, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Congregado, Emilio & Golpe, Antonio A. & Parker, Simon C., 2009. "The Dynamics of Entrepreneurship: Hysteresis, Business Cycles and Government Policy," IZA Discussion Papers 4093, Institute for the Study of Labor (IZA). [Downloadable!]
  8. Peter Thompson & Steven Klepper, 2006. "Intra-Industry Spinoffs," Working Papers 0605, Florida International University, Department of Economics. [Downloadable!]
  9. Paul Gompers & Josh Lerner & David Scharfstein, 2003. "Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999," NBER Working Papers 9816, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Marco Da Rin & Giovanna Nicodano & Alessandro Sembenelli, 2004. "Public Policy and the Creation of Active Venture Capital Markets," Working Papers 270, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  11. Ari Hyytinen & Mika Maliranta, 2006. "When Do Employees Leave Their Job for Entrepreneurship: Evidence from Linked Employer-Employee Data," Discussion Papers 1023, The Research Institute of the Finnish Economy. [Downloadable!]
  12. Laura Bottazzi & Marco da Rin, 2003. "Financing Entrepreneurial Firms in Europe: Facts, Issues, and Research Agenda," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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