Risk-bearing and Entrepreneurship
AbstractIn the 'Knightian' theory of entrepreneurship, entrepreneurs provide insurance to workers by paying fixed wages and bear all the risk of production. This paper endogenizes entrepreneurial risk by allowing for optimal insurance contracts as well as the occupational self-selection. Moral hazard prevents full insurance; increases in an agent’s wealth then entail increases in risk borne. Thus, even under decreasing risk aversion, there are robust instances in which workers are wealthier than entrepreneurs. This empirically implausible result suggests that risk-based explanations for entrepreneurship are inadequate.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6021.
Date of creation: Jan 2007
Date of revision:
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Other versions of this item:
- Andrew F. Newman, 2007. "Risk-Bearing and Entrepreneurship," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-162, Boston University - Department of Economics.
- D2 - Microeconomics - - Production and Organizations
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-28 (All new papers)
- NEP-BEC-2007-01-28 (Business Economics)
- NEP-ENT-2007-01-28 (Entrepreneurship)
- NEP-IAS-2007-01-28 (Insurance Economics)
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