Entrepreneurship, Outside Options and Constrained Efficiency

João Alfredo Galindo da Fonseca and Iain Snoddy
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João Alfredo Galindo da Fonseca: Université de Montréal, CIREQ
Iain Snoddy: UBC, Vancouver School of Economics

No 06-2019, Cahiers de recherche from Centre interuniversitaire de recherche en économie quantitative, CIREQ

Abstract: The literature on search frictions has often adopted the assumption of free entry. In this paper we forgo of this restriction by proposing a more realisitic framework in which individuals are constantly making the decision whether or not to open a firm. Namely, firms are created through endogenous choices and business-owners and workers are drawn from the same pool. We show that in this framework, the Nash bargaining parameter is crucial for internal dynamics. In particular, workers and business owners share the same outside-options. As a result, the wage is no longer unambiguously positively related to the value of unemployment. The constrained efficient solution to this model takes the same form as the standard search model implying the same form for the Hosios condition. However, at this efficient solution changes in the rate ofunemployment are either exacerbated or muted conditional on the value of the match elasticity parameter.

Keywords: search and matching; entrepreneurship; outside options; constrained efficiency (search for similar items in EconPapers)
JEL-codes: D61 E24 J63 J64 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montec:06-2019

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