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Hidden Talents: Entrepreneurship and Pareto‐Improving Private Information

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  • Andrew F. Daughety
  • Jennifer F. Reinganum

Abstract

Two entrepreneurs, each privately informed about her own talent, simultaneously and noncooperatively choose their efforts in producing a new product. Product quality depends on both entrepreneurs’ talents and efforts, but is unobservable by potential buyers prior to purchase; however, buyers can observe the entrepreneurs’ individual efforts. Because the entrepreneurs share the payoff, each is tempted to shirk. However, the need to signal quality to potential buyers serves as a credible commitment to provide greater effort. Thus, the “problem” of adverse selection mitigates the problem of moral hazard, so that a new venture can perform better than the corresponding mature market.

Suggested Citation

  • Andrew F. Daughety & Jennifer F. Reinganum, 2009. "Hidden Talents: Entrepreneurship and Pareto‐Improving Private Information," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 901-934, September.
    • Handle: RePEc:bla:jemstr:v:18:y:2009:i:3:p:901-934
    DOI: 10.1111/j.1530-9134.2009.00233.x
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    Cited by:

    1. Goldlücke, Susanne & Schmitz, Patrick W., 2014. "Investments as signals of outside options," Journal of Economic Theory, Elsevier, vol. 150(C), pages 683-708.
    2. Thomas Hellmann & Scott Stern, 2009. "Introduction to the Special Issue on Economics and Strategy of Entrepreneurship," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(3), pages 615-621, September.
    3. Ohlendorf, Susanne & Schmitz, Patrick, 2009. "Signaling an Outside Option," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 281, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
    4. Seyed Komail Tayebi & Ahmad Googerdchian, 2007. "A Difference-in-Differences (DID) Analysis of Financial Integration and International Trade in ASEAN+5," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 12(3), pages 109-126, fall & wi.

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