Financial trading versus entrepreneurship: Competition for talent and negative feedback effects

Lutz G. Arnold and Sebastian Zelzner

The Quarterly Review of Economics and Finance, 2022, vol. 86, issue C, 186-199

Abstract: Higher market efficiency due to informed financial trading is typically considered to have positive feedback effects on the real economy. We extend the seminal Grossman-Stiglitz (1980) model to highlight an important negative feedback effect from trading to entrepreneurial activity: information revelation via prices leads to a clustering of risk at entrepreneurs. This distorts agents’ occupational choice between financial trading and entrepreneurship, discouraging real economic activity. This negative feedback effect provides explanations for excessive financial trading and multiplicity of equilibria.

Keywords: Market efficiency; Asymmetric information; Allocation of talent; Occupational choice; Feedback effects (search for similar items in EconPapers)
JEL-codes: G14 J24 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:86:y:2022:i:c:p:186-199

DOI: 10.1016/j.qref.2022.07.001

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