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Entrepreneurial Elites: Industry Structure and Welfare Effects of Incubating New Businesses

  • Oliver Fabel

    ()

    (Department of Economics, University of Konstanz)

  • Thomas Weber

    ()

    (Department of Economics, University of Konstanz)

The analysis compares two institutional settings in which individuals with complementary task abilities match to found new firms: corporate spin-offs of initially randomly matched production teams and the rational matching of such teams in an incubator organization. The alternative always consists of seeking employment in industrial firms which pay a certain wage. This wage reflects the expected team quality given that all professionals who do not found firms are randomly matched in production teams. Each institutional setting gives rise to a unique efficient competitive equilibrium such that both industrial and entrepreneurial firms coexist. The efficient incubator equilibrium always induces a larger entrepreneurial sector in the industry. However, the additional entrepreneurial firms founded are rather small. Neither of the two regimes unambiguously induces higher industry-wide investments. Ex-ante welfare comparisons then assume that individuals do not yet know their specific ability combinations. Simulations show that higher degrees of risk-aversion (interest-rates) render the efficient spin-off (incubator) equilibrium dominant.

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Paper provided by Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim in its series Working Papers of the Research Group Heterogenous Labor with number 05-09.

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Length: 40 pages
Date of creation: 15 Dec 2005
Date of revision:
Handle: RePEc:knz:hetero:0509
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