DP11295 The Value of Entrepreneurial Failures: Task Allocation and Career Concerns

Author(s): Andrea Canidio, Patrick Legros
Publication Date: May 2016
Keyword(s): career concerns, entrepreneurial failures, entrepreneurship, learning, organizational choice, task allocation
JEL(s): D83, J24, J62, L26, M13
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11295

The task assignment that maximizes present expected output is not necessarily the most informative about an agent's comparative advantage at different tasks. Entrepreneurs are free to choose their task assignment-workers in firms are not. When labor market frictions are low, any surplus generated by a more informative task as- signment is captured by the worker, and firms maximize present expected output in their task assignment. Hence, agents may choose entrepreneurship to learn their comparative advantage. The opposite holds when labor market frictions are large. The model establishes a causal relation between the degree of labor market frictions, the value of entrepreneurial failures, the level of entrepreneurial activity, the degree of firms' short-termism, and the rate of within-firm talent discovery. The theoretical correlations between these variables are consistent with the evidence available for the US and continental Europe.