Entrepreneurship and Loss-Aversion in a Winner-Take-All Society

We study entrepreneurship in a setting where identical, loss-averse individuals choose between a risky entrepreneurial path and a safe outside option. The combination of effort and luck determine the single winner of the entrepreneurship market. We obtain a closed form solution to equilibrium entry and effort decisions. The novel implications of the model are: (1) Entrepreneurial effort increases with the return to the outside option, all else equal. (2) In high stakes settings with suffi cient loss aversion, a rise in employment wages intensifies competition despite a fall in the number of competitors.