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A Labor-Market Theory of Entrepreneurship\footnote{This paper previously circulated under the title “The Value of Entrepreneurial Failures: Task Allocation and Career Concerns.” We are grateful to Chris Avery, Raul Baptista, Jing-Yuan Chiou, Roberta Dessi, Denis Gromb, Thomas Hellmann, Andrea Mantovani, Massimo Riccaboni, Marko Terviö, Peter Thompson, Timothy van Zandt and conference audiences for helpful comments. Legros gratefully acknowledges the financial support of the European Research Council under the European Union’s Seventh Framework Programme (FP7/2007-2013 / ERC grant agreement n°339950.)}
  • Patrick Legros
Patrick Legros

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Abstract

When labor mobility is imperfect, employers will invest in the discovery of their employees’ talent at different tasks and agents become entrepreneurs only if they have a valuable business idea or cannot find employment. If instead employees can easily move to other firms, employers have little incentive to invest in talent discovery. In this case, an additional motive for entrepreneurship emerges: learning one’s comparative advantage over tasks. We therefore establish a causal relation between the degree of labor-market frictions and different observables: the level of entrepreneurial activity; the value of entrepreneurial failures; the payoff of entrepreneurs relative to workers: the wage of former entrepreneurs relative to former workers; the degree of firms’ short-termism; the rate of within-firm talent discovery. The theoretical correlations between these variables are consistent with the evidence available for the US and continental Europe.