Entrepreneurial Abilities and Liabilities in a Model of Self-Selection

Bell Journal of Economics, 1983, vol. 14, issue 1, pages 70-80

Abstract: The role of the liability form as a signalling device is analyzed in a model of occupational choice (entrepreneurs, employees), with asymmetric information in loan markets about the abilities of entrepreneurs. The properties of the equilibrium are described. When factor prices are exogenous, the feasibility of limited liability is a Pareto improvement over a regime where there is only unlimited liability. This result does not hold when factor prices are endogenous.

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