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Entrepreneurial Abilities and Liabilities in a Model of Self-Selection

Christophe Chamley
The Bell Journal of Economics
Vol. 14, No. 1 (Spring, 1983), pp. 70-80
Published by: RAND Corporation
DOI: 10.2307/3003538
Stable URL: http://www.jstor.org/stable/3003538
Page Count: 11
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Entrepreneurial Abilities and Liabilities in a Model of Self-Selection
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Abstract

The role of the liability form as a signalling device is analyzed in a model of occupational choice (entrepreneurs, employees), with asymmetric information in loan markets about the abilities of entrepreneurs. The properties of the equilibrium are described. When factor prices are exogenous, the feasibility of limited liability is a Pareto improvement over a regime where there is only unlimited liability. This result does not hold when factor prices are endogenous.

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