Entrepreneurship in Equilibrium ¤ Denis Gromb LBS and CEPR David Scharfstein

This paper compares the ̄nancing of new ventures in start-ups (entrepreneurship) and in established ̄rms (intrapreneurship). Intrapreneurship allows established ̄rms 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 ine±cient, 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, Augustin Landier, Raghu Rajan, Antoinette Schoar 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.