Entrepreneurship 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. By contrast, 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 characterize conditions under which there can be too little or too much entrepreneuial activity in equilibrium. ∗We would like to thank Adolfo de Motta, Matthias Dewatripont, Paul Gompers, Jan Zabojnik, Augustin Landier, Josh Lerner, Raghu Rajan, Antoinette Schoar as well as participants in seminars at Amsterdam, Bristol, Chicago, City Business School Gerzensee, HBS, London Business School, LSE, Mannheim, MIT, Munich, NBER, Northwestern, Oxford, Rome, Salerno, and Toulouse for valuable comments. This research was supported by National Science Foundation Grant SES 0079176. All remaining errors are our own. USC FBE FINANCE SEMINAR presented by Denis Gromb FRIDAY, Nov. 21, 2003 10:30 am – 12:00 pm; Room: JKP-204