A study on the role of guanxi in entrepreneurship and employment

This paper examines the role of guanxi in influencing the decision of an individual to be an entrepreneur facing a risky technology or to become a worker facing an unemployment rate. Individuals are assumed to vary in terms of the strength of their established guanxi that could be utilized either to lower the set-up cost as entrepreneurs or to secure jobs as workers. Compared with the case where guanxi can only be used to reduce the individual's set-up cost to become an entrepreneur, it is shown that if guanxi can also help a worker find a job, then whether the employment rate might be improved or worsened will depend on the absolute risk aversion that is increasing or decreasing in income.

Research Highlights► Individuals making an occupational choice may face the failure in the financial market and the job market. ► In these two markets, a non-price consideration such as guanxi would replace the price mechanism. ► Compared to the case where guanxi could only reduce the set-up cost, if guanxi could also help find a job, then the change in employment rate will depend on the absolute risk aversion. ► When guanxi can help both reduce set-up cost and secure a job, the relationship between occupational choice and the strength of guanxi will be "W" shaped.