Entrepreneurship in equilibrium

Gromb, D and Scharfstein, D (2001) Entrepreneurship in equilibrium. Working Paper. London Business School IFA Working Paper.

Abstract

This paper compares the ficing of new ventures in startups (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 labor market. While this is expost inefficient, it provides entrepreneurs with highpowered incentives ex ante. We show that two types of equilibria can arise (and sometime coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external)labor markets are thus particularly valuable, which favors intrapreneurship (entrepreneurship). We also show that there can be too little entrepreneurial activity since entrepreneurs don't take into account the positive effect of their choice of organizational form on the performance of the labor market.