Entrepreneurial Activity in Equilibrium ∗

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 labor 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) labor markets are thus particularly valuable, which favors intrapreneurship (entrepreneurship). We also show that there can be too little or too much entrepreneurial activity. There can be too much because entrepreneurs do not take into account their positive effect on the quality of the labor market. There can be too little because a high quality labor market is bad for entrepreneurial incentives. ∗We would like to thank Matthias Dewatripont, Paul Gompers, Augustin Landier, Raghu Rajan as well as participants in seminars at Harvard Business School, MIT and Northwestern for valuable comments. This research was supported by National Science Foundation Grant SES 00-79176. All remaining errors are our own.