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Entrepreneurship in Equilibrium

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  • Denis Gromb
  • David Scharfstein

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. By contrast, failed entrepreneurs must seek other jobs in an imperfectly informed external labor market. While this external labor market leads to ex post inefficient allocations, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low entrepreneurship equilibrium, the market for failed entrepreneurs is thin, making internal labor markets and intrapreneurship particularly valuable. In a high entrepreneurship equilibrium, the active labor market reduces the value of internal labor markets and encourages entrepreneurship. We also show that there can be too little or too much entrepreneurial activity. There can be too little because entrepreneurs do not take into account their positive effect on the quality of the labor market. There can be too much because a high quality labor market is bad for entrepreneurial incentives.

Suggested Citation

  • Denis Gromb & David Scharfstein, 2002. "Entrepreneurship in Equilibrium," NBER Working Papers 9001, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9001
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    References listed on IDEAS

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    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance

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