DP11295 | The Value of Entrepreneurial Failures: Task Allocation and Career Concerns

Publication Date

05/24/2016

JEL Code(s)

Keyword(s)

Programme Area(s)

Abstract

The task assignment that maximizes present expected output is not necessarily the most informative about an agent’s comparative advantage at different tasks. En- trepreneurs are free to choose their task assignment—workers in firms are not. When labor market frictions are low, any surplus generated by a more informative task as- signment is captured by the worker, and firms maximize present expected output in their task assignment. Hence, agents may choose entrepreneurship to learn their comparative advantage. The opposite holds when labor market frictions are large. The model establishes a causal relation between the degree of labor market frictions, the value of entrepreneurial failures, the level of entrepreneurial activity, the degree of firms’ short-termism, and the rate of within-firm talent discovery. The theoretical correlations between these variables are consistent with the evidence available for the US and continental Europe.