Entrepreneurial talent, occupational choice, and trickle up policies

Maitreesh Ghatak, Massimo Morelli, Tomas Sjöström

Research output: Contribution to journalArticlepeer-review

70 Scopus citations


We study market inefficiencies 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 labor 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.

Original languageEnglish (US)
Pages (from-to)27-48
Number of pages22
JournalJournal of Economic Theory
Issue number1
StatePublished - Nov 2007

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics


  • Adverse selection
  • Entrepreneurial talent
  • Occupational choice


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