Entrepreneurship and Asymmetric Information in Input Markets
Entrepreneurs starting new firms face two sorts of asymmetric information problems. Information about the quality of new investments may be private, leading to adverse selection in credit markets. And, entrepreneurs may not observe the quality of workers applying for jobs, resulting in adverse selection in labor markets. We construct a simple model to illustrate some consequences of new firms facing both sorts of asymmetric information. Multiple equilibria can occur. Stable equilibria can be in the interior, or at a corner in which no entrepreneurs enter. Stable interior equilibria can involve involuntary unemployment, as well as credit rationing. Equilibrium outcomes mismatch workers to firms, and will generally result in an inefficient number of new firms. With involuntary unemployment, there will be too few new firms, but with full employment, there may be too many or too few. Taxes or subsidies on new firms and employment can be used to achieve a second-best optimum. Alternative information assumptions are explored.
|Date of creation:||May 2006|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (613) 533-2250
Fax: (613) 533-6668
Web page: http://qed.econ.queensu.ca/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christian Keuschnigg & Soren Bo Nielsen, 2002.
"Start-ups, Venture Capitalists, and the Capital Gains Tax,"
University of St. Gallen Department of Economics working paper series 2002
2002-05, Department of Economics, University of St. Gallen.
- Keuschnigg, Christian & Nielsen, Soren Bo, 2004. "Start-ups, venture capitalists, and the capital gains tax," Journal of Public Economics, Elsevier, vol. 88(5), pages 1011-1042, April.
- Keuschnigg, Christian & Nielsen, Soren Bo, 2002. "Start-ups, Venture Capitalists and the Capital Gains Tax," CEPR Discussion Papers 3263, C.E.P.R. Discussion Papers.
- Christian Keuschnigg & Søren Bo Nielsen, 2002. "Start-ups, Venture Capitalists, and the Capital Gains Tax," CESifo Working Paper Series 742, CESifo Group Munich.
- Robin Boadway & Jean-François Tremblay, 2003. "Public Economics and Startup Entrepreneurs," CESifo Working Paper Series 877, CESifo Group Munich.
- Kanbur, S. M., 1981.
"Risk taking and taxation : An alternative perspective,"
Journal of Public Economics,
Elsevier, vol. 15(2), pages 163-184, April.
- Kanbur, S.M, 1978. "Risk Taking and Taxation : An Alternative Perspective," The Warwick Economics Research Paper Series (TWERPS) 136, University of Warwick, Department of Economics.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
- Weiss, Andrew W, 1980. "Job Queues and Layoffs in Labor Markets with Flexible Wages," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 526-38, June.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Diamond, Peter A, 1982. "Wage Determination and Efficiency in Search Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 217-27, April.
- 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.
- Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
- Christian Keuschnigg & Soren Bo Nielsen, 2000.
"Tax Policy, Venture Capital, and Entrepreneurship,"
NBER Working Papers
7976, National Bureau of Economic Research, Inc.
- Keuschnigg, Christian & Nielsen, Soren Bo, 2000. "Tax Policy, Venture Capital and Entrepreneurship," CEPR Discussion Papers 2626, C.E.P.R. Discussion Papers.
- Christian Keuschnigg & Soren Bo Nielsen, 2000. "Tax Policy, Venture Capital, and Entrepreneurship," Econometric Society World Congress 2000 Contributed Papers 1848, Econometric Society.
- Christian Keuschnigg & Søren Bo Nielsen, . "Tax Policy, Venture Capital, and Entrepreneurship," EPRU Working Paper Series 00-18, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Boadway, Robin & Sato, Motohiro, 1999. " Information Acquisition and Government Intervention in Credit Markets," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 1(3), pages 283-308.
- de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
- Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
- Robin Boadway & Michael Keen, 2006. "Financing and Taxing New Firms under Asymmetric Information," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 62(4), pages 471-502, December.
When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:1069. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Babcock)
If references are entirely missing, you can add them using this form.