A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion
Posted: 17 Nov 2009
Date Written: 1979
Abstract
Based on an entrepreneurial model having historical roots in Knight (1921), a competitive general equilibrium theory of the firm under uncertainty is constructed. The expected utility maximization criterion is used and justified by assuming that for each firm there is an expected utility maximizing entrepreneur who makes decisions for the firm. The model also uses a free-entry assumption to endogenously determine the number of firms, the identity of the entrepreneurs who run them, and the individual characteristics of the entrepreneurs. In the model, it is assumed that individuals are equal in their ability to perform both entrepreneurial and labor functions and that they have a choice between operating a risky enterprise or working for a risk-free wage--i.e., the individuals differ only in their willingness to bear risk. Individuals who are less averse to risk are more likely to become entrepreneurs, while the individuals who are more averse to risk work as laborers. (SFL)
Keywords: Risk orientation, Uncertainty, Human capital, Equilibrium, Firm behavior, Individual traits, Startups, Labor force, Labor markets
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