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Entrepreneurship in Equilibrium

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  • Scharfstein, David S.
  • Gromb, Denis

Abstract

This Paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. Instead, failed entrepreneurs must seek other jobs in an imperfectly informed external labour market. While this is ex-post inefficient, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external) labour markets are thus particularly valuable, which favours intrapreneurship (entrepreneurship). We also characterize conditions under which there can be too little or too much entrepreneurial activity in equilibrium.

Suggested Citation

  • Scharfstein, David S. & Gromb, Denis, 2002. "Entrepreneurship in Equilibrium," CEPR Discussion Papers 3652, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3652
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    References listed on IDEAS

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    More about this item

    Keywords

    entrepreneurship; Venture capital; Incentives;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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