Firm Formation with Complementarities : The Role of the Entrepreneur

We model entrepreneurship and the emergence of firms as a result of simultaneous bidding for labor services among heterogeneous agents. Unique to our approach is that occupational choices, job matching and organizational forms are determined simultaneously, so that the opportunity costs of entrepreneurs are accounted for. We find that individuals who are relatively unmanageable become entrepreneurs; entrepreneurs compete against each other and create value by building efficient organizations and offering potentially very well paid jobs for others; and entry of an additional entrepreneur typically reduces some individual wages, but always raises the average wage and depresses the average incomes of incumbent entrepreneurs - strictly so if the new firm partially imitates existing organizations. Our results shed a new light on the role of entrepreneurs in the economy and may be applied to explain low returns to self-employment