Entrepreneurship in Equilibrium

David Scharfstein and Denis Gromb

No 3652, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper compares the financing of new ventures in start-ups (entrepreneurship) and in established firms (intrapreneurship). Intrapreneurship allows established firms to use information on failed intrapreneurs to redeploy them into other jobs. Instead, failed entrepreneurs must seek other jobs in an imperfectly informed external labour market. While this is ex-post inefficient, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external) labour markets are thus particularly valuable, which favours intrapreneurship (entrepreneurship). We also characterize conditions under which there can be too little or too much entrepreneurial activity in equilibrium.

Keywords: entrepreneurship; Venture capital; Incentives (search for similar items in EconPapers)
JEL-codes: D23 G24 G32 G34 M13 (search for similar items in EconPapers)
Date: 2002-10
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-ind
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

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Working Paper: Entrepreneurship in Equilibrium (2002)
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