Entrepreneurship and Asymmetric Information in Input Markets
AbstractEntrepreneurs starting new firms face two sorts of asymmetric information problems. Information about the quality of new investments may be private, leading to adverse selection in credit markets. And, entrepreneurs may not observe the quality of workers applying for jobs, resulting in adverse selection in labor markets. We construct a simple model to illustrate some consequences of new firms facing both sorts of asymmetric information. Multiple equilibria can occur. Stable equilibria can be in the interior, or at a corner in which no entrepreneurs enter. Stable interior equilibria can involve involuntary unemployment, as well as credit rationing. Equilibrium outcomes mismatch workers to firms, and will generally result in an inefficient number of new firms. With involuntary unemployment, there will be too few new firms, but with full employment, there may be too many or too few. Taxes or subsidies on new firms and employment can be used to achieve a second-best optimum. Alternative information assumptions are explored.
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Bibliographic InfoPaper provided by Queen's University, Department of Economics in its series Working Papers with number 1069.
Length: 42 pages
Date of creation: May 2006
Date of revision:
entrepreneurship; asymmetric information; adverse selection;
Other versions of this item:
- Robin Boadway & Motohiro Sato, 2011. "Entrepreneurship and asymmetric information in input markets," International Tax and Public Finance, Springer, vol. 18(2), pages 166-192, April.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-06-03 (All new papers)
- NEP-BEC-2006-06-03 (Business Economics)
- NEP-ENT-2006-06-03 (Entrepreneurship)
- NEP-FIN-2006-06-03 (Finance)
- NEP-FMK-2006-06-03 (Financial Markets)
- NEP-PBE-2006-06-03 (Public Economics)
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