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Occupational choice and the quality of entrepreneurs

İnci, Eren (2007) Occupational choice and the quality of entrepreneurs. [Working Paper / Technical Report] Sabanci University ID:SU_FASS_2007/0013

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Abstract

This paper focuses on the quality of entrepreneurs when individuals, who differ in terms of entrepreneurial ability and wealth, choose between entrepreneurship and wage-earning. A loan is required to become an entrepreneur. Four wealth classes form endogenously. Banks' inability to identify the ability of individuals leads them to o¤er pooling contracts to the poor and the lower-middle classes. Regardless of ability, all poor class individuals become workers and all lower-middle class individuals become entrepreneurs. Banks are able to offer separating contracts to the upper-middle and the rich classes. High-ability individuals in these wealth classes become entrepreneurs and their low-ability counterparts become workers. Equilibrium contracts may entail cross-subsidies within or between occupations. In some economies, a small success tax on entrepreneurs used to subsidize workers can in- crease the average quality of entrepreneurs and welfare by changing the thresholds of the wealth classes. In some others a reverse policy is required. Since the aggregate level of investment is fixed, the reason for these policies is not under- or overinvestment by entrepreneurs, as it often is in previous literature.

Item Type:Working Paper / Technical Report
Uncontrolled Keywords:Adverse selection; entrepreneurship; general equilibrium contract theory; moral hazard; occupational choice; success tax; wage subsidy
Subjects:H Social Sciences > HC Economic History and Conditions
ID Code:4923
Deposited By:Eren İnci
Deposited On:21 Oct 2007 21:20
Last Modified:21 Jun 2013 10:53

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