Entrepreneurship and organization design

We model entrepreneurship and the emergence of firms as an outcome of simultaneous bidding for labor services among heterogeneous agents. What distinguishes our approach from prior work is that occupational choice and job matching are determined simultaneously, so that the opportunity costs of entrepreneurs are accounted for. Those who are relatively unmanageable, while possibly excellent managers themselves, become entrepreneurs. Entrepreneurs compete and create value by building efficient organizations and offering potentially well-paid jobs to others. While the entry of an additional entrepreneur typically reduces some individual wages, we show that it always raises the average wage and depresses the average income of incumbent entrepreneurs. This result may help explain the empirically low returns to entrepreneurship.

► We model entrepreneurship and the emergence of firms. ► Occupational choices, job matching and organizational forms arise simultaneously. ► Individuals who are relatively unmanageable become entrepreneurs. Yet, some of them may be excellent managers themselves. ► Entrepreneurs build efficient organizations and offer jobs to others. ► Entry of an additional entrepreneur may reduce some individual wages.