Reputation Capital, Financial Capital, and Transition to Entrepreneurship
We provide a theory for career choices of employees willing to become entrepreneurs and facing credit constraints. We show that they need a sufficient mix of reputation and financial capital. We consider their choice to work for transparent or opaque firms. Transparent firms disclose more information about their employees. It has two consequences. First, it eases the updating of the employees'reputation, which is positive for those with a bad initial reputation and negative otherwise. Second, it fosters incentives to exert effort, which increases the wage, and thus, the financial capital available for setting a business venture. Employees thus adopt strategies that depend on their initial reputation. We also show that employees whose alternative is to choose between transparent and opaque projects to work on once employed make transparency choices that differ from employees who choose firms to work for. The former are less likely to become entrepreneurs than the latter.
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