Entrepreneurial talent, occupational choice, and trickle up policies

We study market ine¢ ciencies and policy remedies when agents choose their occupations, and entrepreneurial talent is subject to private information. Untalented entrepreneurs depress the returns to entrepreneurship because of adverse selection. The severity of this problem depends on the outside option of entrepreneurs, which is working for wages. This links credit, product and labour markets. A rise in wages reduces the adverse selection problem. These multimarket interactions amplify productivity shocks and may generate multiple equilibria. If it is impossible to screen entrepreneurs then all agents unanimously support a tax on entrepreneurs that drives out the less talented ones. However, if screening is possible, e.g., if wealthy entrepreneurs can provide collateral for their loans, then wealthy entrepreneurs do not support surplus enhancing taxes. J.E.L. Classi…cation Numbers: D82, E44, J24, O16 Keywords: Occupational Choice, Adverse Selection, Entrepreneurial Talent. We thank the Institute for Advanced Study for providing an excellent research environment. Morelli is grateful for …nancial support from the National Science Foundation under grant SES0213312. Comments and suggestions by the Associate Editor, two anonymous referees, Madhav Aney, Rocco Machiavello, Giacomo Rodano, Colin Rowat, and helpful feedback from several seminar audiences are gratefully acknowledged. Special thanks are due to one referee whose suggestions led to signi…cant improvements. The usual disclaimer applies. E-mail: [email protected], [email protected], [email protected].