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Constrained inefficiency of competitive entrepreneurship

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  • Ando, Sakai
  • Matsumura, Misaki

Abstract

We study the constrained efficiency of a competitive entrepreneurship model that features the occupation choice between entrepreneurs and workers. It is shown that, even when (1) the only friction is uninsurable entrepreneurial risks and (2) agents are risk-averse, the competitive market can generate too many entrepreneurs. We present a sufficient statistic that determines the constrained inefficiency and its direction (whether market generates too many entrepreneurs or too few) by exploiting the unique feature of the model where the equilibrium is characterized by an indifference condition instead of a marginal condition. The framework is also pedagogically useful to understand constrained efficiency analysis at intuitive level.

Suggested Citation

  • Ando, Sakai & Matsumura, Misaki, 2020. "Constrained inefficiency of competitive entrepreneurship," Journal of Mathematical Economics, Elsevier, vol. 88(C), pages 98-103.
    • Handle: RePEc:eee:mateco:v:88:y:2020:i:c:p:98-103
    DOI: 10.1016/j.jmateco.2020.03.005
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