Working Paper: CEPR ID: DP6021
Authors: Andrew Newman
Abstract: In the 'Knightian' theory of entrepreneurship, entrepreneurs provide insurance to workers by paying fixed wages and bear all the risk of production. This paper endogenizes entrepreneurial risk by allowing for optimal insurance contracts as well as the occupational self-selection. Moral hazard prevents full insurance; increases in an agent?s wealth then entail increases in risk borne. Thus, even under decreasing risk aversion, there are robust instances in which workers are wealthier than entrepreneurs. This empirically implausible result suggests that risk-based explanations for entrepreneurship are inadequate.
Keywords: moral hazard; occupational choice; principal-agent model
JEL Codes: D2; D8; L2; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wealth (D31) | Risk-bearing (G32) |
| Moral Hazard alters Knightian theory (D81) | Risk-bearing (G32) |
| Wealth (D31) | Risk Aversion (D81) |
| Risk Aversion (D81) | Risk-bearing (G32) |