UE 7: A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion Flashcards
What are the final results of Richard E. Kihlstrom and Jean-Jacques Laffont (1979)?
- Under the assumptions of the model, there exists wage 𝑤∗ that would make the agent 𝛼∗ indifferent between becoming an entrepreneur or a worker.
- In equilibrium, more risk-averse individuals become workers while the less risk-averse become entrepreneurs.
- More risk-averse entrepreneurs operate smaller firms and thus use less labor than the less risk-averse.
- Economy-wide increase in risk-aversion increases supply of workers and therefore reduces the equilibrium wage.
How is an EQ reached in Richard E. Kihlstrom and Jean-Jacques Laffont (1979)?
- An equilibrium is reached when the labor market clears.
- At equilibrium wage, the labor demanded by all agents who choose to become entrepreneurs equals that supplied by agents who choose to enter the labor market.
What are the variables for Richard E. Kihlstrom and Jean-Jacques Laffont (1979)?
A: a set of agents
I: a set of incomes [0, ∞)
u: the agents utility, continuous and twice differentiable
What is true for all agents in Richard E. Kihlstrom and Jean-Jacques Laffont (1979)?
They have an Arrow-Pratt Measure > 0, such that they’re all risk averse.
Under what conditions does an agent prefer to become an entrepreneur in Richard E. Kihlstrom and Jean-Jacques Laffont (1979)?
When the utility of their wage, their gain from technology, and that which they lose by employing workers is greater than the utility of their base wage and that that they receive through work.
