Risk-bearing and Entrepreneurship

Andrew Newman

No 6021, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 self-selection. 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.

Keywords: Moral hazard; Occupational choice; Principal-agent model (search for similar items in EconPapers)
JEL-codes: D2 D8 L2 O16 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-bec, nep-ent and nep-ias
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Citations: View citations in EconPapers (37)

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Journal Article: Risk-bearing and entrepreneurship (2007)
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