Imperfect Transmission of Tacit Knowledge and other Barriers to Entrepreneurship

This paper identifies several distortions which create barriers to entrepreneurship. First, in addition to the innate entry cost, there are entry costs caused by regulation. Second, union wage policies raise the opportunity cost of entrepreneurship. Third, inefficiencies in the transmission of tacit knowledge between generations of entrepreneurs can arise: with access to within-family ownership transfer, the outside market for entrepreneurship operates as a lemon’s market. This problem becomes relevant when the economic life of a business idea exceeds the active life of an entrepreneur.barriers to entrepreneurship, tacit knowledge, occupational choice

Defence Commitment and Deterrence in the Theory of War

The paper shows that a defending army, particularly a small one, can fight hard when attacked by a predator. The result arises in the commitment equilibrium of a model with intergenerational altruism. By implication, the paper offers a novel theory of deterrence and defence policy. It shows that in the absence of informational constraints, there is a unique army size that is sufficient for deterrence. Under informational restrictions, a pooling equilibrium may exist where a victim with strong intergenerational altruism overinvests in its army, while the victim with a more limited altruism free rides on the information gap of the predator and builds a smaller army. Conditions for the existence of a separating equilibrium are established in terms of the cost of war. It turns out that the optimal defence policy need not satisfy the deterrence requirement. The case of separating equilibrium helps to explain why wars exist in equilibrium

Entrepreneurship, Economic Risks, and Risk Insurance in the Welfare State: Results with OECD Data 1978-93

We find evidence in the OECD cross-country data to support the Knightian view that non-diversifiable economic risks shape equilibrium entrepreneurship in an occupational choice model. Differential social insurance of entrepreneurial and labor risk is found to be statistically significant and detrimental to entrepreneurship. The crowding-out effect of public production of private goods on entrepreneurship dominates the crowding-in effect of public production of public goods in the OECD data. Weak evidence is found for the proposition that the rate of entrepreneurship is related to the degree of income inequality and to the union power in the economy. The results also suggest that a high living standard has a detrimental effect on self-employment.Entrepreneurship, risks, the welfare state, social risk insurance, crowding-out

The Optimal Portfolio of Start-Up Firms in Venture Capital Finance

A venture capitalist faces a trade-off between the extent of managerial advice allocated to each start-up and the total number of firms advised. Diminishing returns to advice per firm call for a larger portfolio. As advice gets diluted, further expansion of the portfolio eventually becomes unprofitable.Venture capital finance, double-sided moral hazard, company portfolio

Entrepreneurship in a Unionised Economy

This paper shows that labor market institutions are important for the formation of new enterprises. The effects of labor market institutions on entrepreneurship, wage determination, and firm size are analysed analytically and illustrated numerically. The main result is that an increase in union power reduces the equilibrium rate of entrepreneurship and reduces the average size of enterprises.Entrepreneurship, labor market institutions, occupational choice, unions

Why to Invest in your Neighbor? Social Contract on Educational Investment

It may be in the interest of low-ability individuals to subsidize the education of high-ability individuals. Sufficient conditions are surprisingly mild: positive externalities in education and complementarity in production between human capital and labor supllied by the low-ability individuals. However, tax competition and the free mobility of the educated give rise to time-inconsistency and free-riding problems which render such a social contract infeasible and result in a subotimally low investment in education.Externalities in education, complementarity, social contract, tax competition

Making the World a Better Place : Cascade Effects in Consumer Boycotts under Social Group Identity

Consumer boycotts help in supporting established social norms. Their effectiveness as a disciplinary mechanism in guiding corporate ethics has, however, been questioned. The paper considers three unexplored mechanisms, pointing to a more optimistic view, i.e. a group identity effect, anticipatory effects, and a firm size effect in global markets. The first set of results is related to the need of people to belong to groups with a social mission. It is shown that powerful cascade effects arise on the industry structure in equilibrium when the group dependency dominates among consumers. Less dramatic cascades arise with more independent consumers in the formation of ethical values as opportunist free riding becomes an option. Second, the development of modern information technology facilitates efficient monitoring of corporate ethics of large global firms resulting in potentially efficient means of disciplining. By implication, the consumer boycotts can lead to the evolution of the industry structures in favour of large firms. Success of consumers’ impact is, however, hard to test as firms can ex ante anticipate the risk of becoming the subject of a boycott if caught

Cyber Technology and the Arms Race

Cyber technology represents digital military capability with the purpose of causing damage to the military strength of a potential enemy. War using conventional weapons may be preceded by or combined with a strike using cyber technology. This paper introduces such technology into the theory of conflicts. The cost of war relative to the payoff from victory turns out to be crucial for the results on armament decisions. In the war game, two types of Nash equilibria both subject to warfare are possible depending on the perceived cost of war. In a symmetric war game with equal cyber capabilities and a low cost of war, hostile countries choose to invest an equal amount of resources in their militaries. A higher cost of war leads to increased armament. However, asymmetric access to cyber technology limits the international arms race with conventional weapons when the cost of war is small while it - again - intensifies the arms race when the cost of war is greater. In all cases, access to cyber technology makes wars with conventional weapons more likely. Heterogeneity in the success of cyber programs creates a first-mover advantage for a superior country in terms of a possibility for a pre-emptive strike

Term Length and the Quality of Appointments

Consider a principal who appoints an agent. Let the agent potentially serve for a sufficiently long time that one principal is replaced by another over this period. Suppose also that the quality of the agent appointed increases with the effort the incumbent principal devotes to hiring. Then the quality of the appointment may increase with the length of the agent?s term. Moreover, policies such as mandatory retirement which increase a prinicpal?s concern for output after he leaves office, may induce better hiring.Hiring, tenure, quality of appointment