Risk-Bearing and Entrepreneurship

Andrew F. Newman

No dp-162, Boston University - Department of Economics - The Institute for Economic Development Working Papers Series from Boston University - Department of Economics

Abstract: In the “Knightian” theory of entrepreneurship, entrepreneurs provide insurance to workers by paying fixed wages and bear all the risk of production. This paper endogenizes entrepreneurial risk by allowing for optimal insurance contracts as well as the occupational selfselection. Moral hazard prevents full insurance; increases in an agent’s wealth then entail increases in risk borne. Thus, even under decreasing risk aversion, there are robust instances in which workers are wealthier than entrepreneurs. This empirically implausible result suggests that risk-based explanations for entrepreneurship are inadequate.

Date: 2007-02
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Working Paper: Risk-bearing and Entrepreneurship (2007)
Journal Article: Risk-bearing and entrepreneurship (2007)
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