Working Paper: CEPR ID: DP3652
Authors: Denis Gromb; David Scharfstein
Abstract: 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. Instead, failed entrepreneurs must seek other jobs in an imperfectly informed external labour market. While this is ex-post inefficient, it provides entrepreneurs with high-powered incentives ex ante. We show that two types of equilibria can arise (and sometimes coexist). In a low (high) entrepreneurship equilibrium, the market for failed entrepreneurs is thin (deep). Internal (external) labour markets are thus particularly valuable, which favours intrapreneurship (entrepreneurship). We also characterize conditions under which there can be too little or too much entrepreneurial activity in equilibrium.
Keywords: entrepreneurship; incentives; venture capital
JEL Codes: D23; G24; G32; G34; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| thin external labor market for failed entrepreneurs (J68) | discourages entrepreneurship (L26) |
| high entrepreneurial activity (L26) | populates external labor market with high-quality failed entrepreneurs (J68) |
| populates external labor market with high-quality failed entrepreneurs (J68) | reduces value of internal labor market (J63) |
| reduces value of internal labor market (J63) | fosters more entrepreneurial ventures (L26) |
| entrepreneurship (M13) | improves labor market conditions for managers (J48) |
| improves labor market conditions for managers (J48) | encourages further entrepreneurial activity (L26) |
| entrepreneurial activity can be too low (L26) | due to externalities (D62) |
| too much entrepreneurial activity (M13) | reduces effort levels of other entrepreneurs (L26) |