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Risk-bearing and Entrepreneurship

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  • Newman, Andrew

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.

Suggested Citation

  • Newman, Andrew, 2007. "Risk-bearing and Entrepreneurship," CEPR Discussion Papers 6021, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:6021
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    References listed on IDEAS

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    More about this item

    Keywords

    moral hazard; occupational choice; principal-agent model;
    All these keywords.

    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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