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Risk-bearing and entrepreneurship

  • Newman, Andrew F.

In 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 selfselection. 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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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 137 (2007)
Issue (Month): 1 (November)
Pages: 11-26

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Handle: RePEc:eee:jetheo:v:137:y:2007:i:1:p:11-26
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. W. Bentley MacLeod & Daniel Parent, 1998. "Job Characteristics and the Form of Compensation," CIRANO Working Papers 98s-08, CIRANO.
  2. Morduch, J., 1995. "Poverty and Vulnerability," Papers 477, Harvard - Institute for International Development.
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  15. repec:eme:rlepps:v:18:y:1999:i:1999:p:177-242 is not listed on IDEAS
  16. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September.
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