Matching Ability - Elites in Partnerships : The Economics of Organizing Entrepreneurial Activity

Innovative projects can be carried out by small entrepreneurial partnerships or within large industrial firms. We investigate the effects of fostering the former by organizing an quot;incubatorquot; to improve the matching of individuals in teams. The respective equilibrium then entails a larger entrepreneurial sector. However, the industrial sector loses these professional elites. Hence, the effects on industry-wide investments and welfare are ambiguous: only societies whose members exhibit relatively low degrees of risk-aversion are likely to benefit from the improved matching. Interestingly, rational matching in an incubator becomes dominant with higher interest rates