All entrepreneurial productivity increases are not created equal

Abstract

We examine the impact of productivity increases in a setting where wealth-constrained entrepreneurs are privately informed about whether their project will succeed with high (pH) or low (pL) probability. Not surprisingly, many productivity increases (e.g., an increase in pH) generate gains for entrepreneurs and/or venture capitalists. However, some productivity increases (e.g., an increase in pL) can generate widespread losses. Furthermore, entrepreneurs with low-productivity projects can benefit more from policies that increase the productivity of high-quality projects than from policies that increase their own productivity. Therefore, the design of policy to enhance welfare in the entrepreneurial sector can entail important subtleties.