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Risk-bearing and entrepreneurship

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  • Newman, Andrew F.

Abstract

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 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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Suggested Citation

  • Newman, Andrew F., 2007. "Risk-bearing and entrepreneurship," Journal of Economic Theory, Elsevier, vol. 137(1), pages 11-26, November.
  • Handle: RePEc:eee:jetheo:v:137:y:2007:i:1:p:11-26
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    Citations

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    Cited by:

    1. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.
    2. Perroni, Carlo & Proto, Eugenio, 2007. "Moral Hazard and Entrepreneurial Failure in a Two-sector Model of Productive Matching - with an Application to the Natural Resource Curse," The Warwick Economics Research Paper Series (TWERPS) 796, University of Warwick, Department of Economics.
    3. Jean P. Sepúlveda & Claudio A. Bonilla, 2014. "The factors affecting the risk attitude in entrepreneurship: evidence from Latin America," Applied Economics Letters, Taylor & Francis Journals, vol. 21(8), pages 573-581, May.
    4. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
    5. Patrick Legros & Andrew F. Newman, 2007. "Beauty Is a Beast, Frog Is a Prince: Assortative Matching with Nontransferabilities," Econometrica, Econometric Society, vol. 75(4), pages 1073-1102, July.
    6. Gries, Thomas & Naude, Wim, 2009. "When to Start a New Firm?: Modelling the Timing of Novice and Serial Entrepreneurs," WIDER Working Paper Series 039, World Institute for Development Economic Research (UNU-WIDER).
    7. Giuseppe Coco & Giuseppe Pignataro, 2013. "Unfair credit allocations," Small Business Economics, Springer, vol. 41(1), pages 241-251, June.
    8. Gian Luca Clementi & Thomas Cooley & Sonia Di Giannatale, 2010. "A Theory of Firm Decline," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 861-885, October.
    9. Esteban Jaimovich, 2010. "Adverse Selection and Entrepreneurship in a Model of Development," Scandinavian Journal of Economics, Wiley Blackwell, pages 77-100.
    10. Milo Bianchi & Magnus Henrekson, 2005. "Is Neoclassical Economics still Entrepreneurless?," Kyklos, Wiley Blackwell, vol. 58(3), pages 353-377, July.
    11. Delpierre, Matthieu & Verheyden, Bertrand & Weynants, Stéphanie, 2016. "Is informal risk-sharing less effective for the poor? Risk externalities and moral hazard in mutual insurance," Journal of Development Economics, Elsevier, vol. 118(C), pages 282-297.
    12. Rei, Claudia, 2011. "The organization of Eastern merchant empires," Explorations in Economic History, Elsevier, vol. 48(1), pages 116-135, January.
    13. Bel, Roland & Smirnov, Vladimir & Wait, Andrew, 2015. "Team composition, worker effort and welfare," International Journal of Industrial Organization, Elsevier, vol. 41(C), pages 1-8.
    14. repec:eee:ecolet:v:157:y:2017:i:c:p:14-16 is not listed on IDEAS
    15. Mette Ejrnæs & Stefan Hochguertel, 2008. "Entrepreneurial Moral Hazard in Income Insurance: Empirical Evidence from a Large Administrative Sample," CAM Working Papers 2008-02, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
    16. G. Coco & G. Pignataro, 2012. "Wealth inequality, unequal opportunities and inefficient credit market," Working Papers wp851, Dipartimento Scienze Economiche, Universita' di Bologna.
    17. Naude, Wim, 2008. "Entrepreneurship in Economic Development," WIDER Working Paper Series 020, World Institute for Development Economic Research (UNU-WIDER).
    18. Angela A. Stanton & Isabell M. Welpe, 2010. "Risk and Ambiguity: Entrepreneurial Research from the Perspective of Economics," Chapters,in: Neuroeconomics and the Firm, chapter 2 Edward Elgar Publishing.
    19. Nelson Duarte, 2013. "Entrepreneurship and Local Sustainability: Is There any Relation? A Case Study in the Region Vale do Sousa," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(4), pages 93-116.
    20. Patrick Legros & Andrew Newman, 2007. "Beauty is a beast, frog is a prince :assortative matching in a nontransferable world," ULB Institutional Repository 2013/7022, ULB -- Universite Libre de Bruxelles.
    21. Coco, Giuseppe & Pignataro, Giuseppe, 2014. "The poor are twice cursed: Wealth inequality and inefficient credit market," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 149-159.
    22. Kameliia Petrova, 2012. "Part-time entrepreneurship and financial constraints: evidence from the Panel Study of Entrepreneurial Dynamics," Small Business Economics, Springer, vol. 39(2), pages 473-493, September.
    23. Legros, Patrick & Newman, Andrew, 2002. "Assortative Matching in a Non-transferable World," CEPR Discussion Papers 3469, C.E.P.R. Discussion Papers.
    24. Franco, April Mitchell & Mitchell, Matthew & Vereshchagina, Galina, 2011. "Incentives and the structure of teams," Journal of Economic Theory, Elsevier, vol. 146(6), pages 2307-2332.
    25. Burak Uras, 2012. "Entrepreneurship and Technology Choice with Limited Contract Enforcement," 2012 Meeting Papers 599, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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