Outside (option) in the orchard: lemons or peaches?

Christian Pietro () and Marco Sorge
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Christian Pietro: University of Naples Parthenope and CELPE

Economia e Politica Industriale: Journal of Industrial and Business Economics, 2018, vol. 45, issue 4, No 6, 555-564

Abstract: Abstract We study how an employment-related outside option affects equilibrium properties of credit markets plagued with asymmetric information, when returns to entrepreneurial ventures are ranked by first-order stochastic dominance. While greater separation of expected payoffs in paid employment than in entrepreneurship may involve credit rationing or market breakdown, a lemons problem in the outside option may produce multiple competitive equilibria, each featuring favorable selection in the credit market. Under these circumstances, informational asymmetries will not prevent high-ability individuals from pursuing entrepreneurship and yet induce more investment than is socially efficient. This prediction is consistent with recent empirical evidence on the relative importance of rationing vis-à-vis over-provision for credit seeking, informationally opaque firms.

Keywords: Occupational choice; Entrepreneurship; Credit markets; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D82 G2 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s40812-018-0099-8

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