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Entrepreneurship, Asymmetric Information, and Unemployment

  • Robin Boadway
  • Nicolas Marceau
  • Maurice Marchand
  • Marianne Vigneault

We examine how three sources of asymmetric information affect the supply of entrepreneurs and unemployment. In the first case, banks cannot observe entrepreneurs' risk of failure so ration credit. This increases the number of entrepreneurs and the level of unemployment. In the second case, firms cannot observe workers' effort so offer a wage above the market clearing one. This results in unemployment and too few entrepreneurs. The final case arises when firms cannot observe workers' abilities. A pooling wage is offered and results in too many entrepreneurs. The role of government in restoring efficiency is explored. Copyright Kluwer Academic Publishers 1998

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File URL: http://hdl.handle.net/10.1023/A:1008682110911
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Article provided by Springer & International Institute of Public Finance in its journal International Tax and Public Finance.

Volume (Year): 5 (1998)
Issue (Month): 3 (July)
Pages: 307-327

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Handle: RePEc:kap:itaxpf:v:5:y:1998:i:3:p:307-327
DOI: 10.1023/A:1008682110911
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  1. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  2. Marc Cowling & Mark Taylor & Peter Mitchell, 2004. "Job Creators," Manchester School, University of Manchester, vol. 72(5), pages 601-617, 09.
  3. Besanko, David & Thakor, Anjan V., 1987. "Competitive equilibrium in the credit market under asymmetric information," Journal of Economic Theory, Elsevier, vol. 42(1), pages 167-182, June.
  4. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  5. Aghion, Philippe & Howitt, Peter, 1991. "Growth and Unemployment," CEPR Discussion Papers 577, C.E.P.R. Discussion Papers.
  6. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
  7. Boadway, Robin & Marchand, Maurice & Pestieau, Pierre, 1991. "Optimal linear income taxation in models with occupational choice," Journal of Public Economics, Elsevier, vol. 46(2), pages 133-162, November.
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