A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion

Posted: 17 Nov 2009

See all articles by Richard E. Kihlstrom

Richard E. Kihlstrom

University of Pennsylvania - Finance Department

Jean-Jacques Laffont

affiliation not provided to SSRN

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

Suggested Citation

Kihlstrom, Richard E. and Laffont, Jean-Jacques, A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion (1979). University of Illinois at Urbana-Champaign's Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship, Available at SSRN: https://ssrn.com/abstract=1505243

Richard E. Kihlstrom (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Jean-Jacques Laffont

affiliation not provided to SSRN

No Address Available

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