TY  - JOUR
AU  - Gromb,Denis
AU  - Scharfstein,David
TI  - Entrepreneurship in Equilibrium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9001
PY  - 2002
Y2  - June 2002
UR  - http://www.nber.org/papers/w9001
L1  - http://www.nber.org/papers/w9001.pdf
N1  - Author contact info:
Denis Gromb
INSEAD
Boulevard de Constance
77305 Fontanebleau
France
E-Mail: denis.gromb@insead.edu

David S. Scharfstein
Harvard Business School
Baker 239
Soldiers Field
Boston, MA 02163
Tel: 617/496-5067
Fax: 617/496-8443
E-Mail: dscharfstein@hbs.edu
AB  - 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.  By contrast, failed entrepreneurs must seek other jobs in an imperfectly informed external labor market.  While this external labor market leads to ex post inefficient allocations, it provides entrepreneurs with high-powered incentives ex ante.  We show that two types of equilibria can arise (and sometimes coexist).  In a low entrepreneurship equilibrium, the market for failed entrepreneurs is thin, making internal labor markets and intrapreneurship particularly valuable.  In a high entrepreneurship equilibrium, the active labor market reduces the value of internal labor markets and encourages entrepreneurship. We also show that there can be too little or too much entrepreneurial activity.  There can be too little because entrepreneurs do not take into account their positive effect on the quality of the labor market.  There can be too much because a high quality labor market is bad for entrepreneurial incentives.
ER  -