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Entrepreneurship, outside options and constrained

Author

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  • Joao Galindo da Fonseca

    (Université de Montréal)

  • Iain Snoddy

    (Vancouver School of Economics, University of British Columbia)

Abstract

The literature on search frictions has often adopted the assumption of free entry. In this paper we forgo of this restriction by proposing a more realistic framework in which individuals are constantly making the decision whether or not to open a firm. Namely, firms are created through endogenous choices and business-owners and workers are drawn from the same pool. We show that in this framework, the Nash bargaining parameter is crucial for internal dynamics. In particular, workers and business owners share the same outside-options. As a result, the wage is no longer unambiguously positively related to the value of unemployment. The constrained efficient solution to this model takes the same form as the standard search model implying the same form for the Hosios condition. However, at this efficient solution changes in the rate of unemployment are either exacerbated or muted conditional on the value of the match elasticity parameter.

Suggested Citation

  • Joao Galindo da Fonseca & Iain Snoddy, 2019. "Entrepreneurship, outside options and constrained," Cahiers de recherche 2019-06, Universite de Montreal, Departement de sciences economiques.
    • Handle: RePEc:mtl:montde:2019-06
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    File URL: http://hdl.handle.net/1866/21923
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    More about this item

    Keywords

    Search and matching; Entrepreneurship; Outside options; Constrained efficiency;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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