Optimism and firm formation
Rigotti,L. Ryan,M. Vaithianathan,R.
Rigotti,L.
Ryan,M.
Vaithianathan,R.
Abstract
This paper analyses firm formation and innovation in an economy where agents differ with respect to their optimism in the face of ambiguity. Individuals choose between starting a firm or working in one; and also between employing a traditional technology or a new technology about which little is known. In the face of ambiguity, decision-makers are either optimistic or pessimistic. We study the innovation-proof equilibria of the economy: wages clear all labor markets when agents make optimal occupational choices, and no mutually beneficial opportunity for innovation remains unexploited. In equilibrium, optimists are more likely to form firms, but also more likely to be workers in firms using the ambiguous technology. This phenomenon sheds new light on the relationship between firm culture and technology. We find that three types of firms emerge in equilibrium: entrepreneurial firms, where both owners and workers are optimists operating a highly ambiguous technology; traditional firms, where an optimistic owner employs a pessimistic worker and uses a less ambiguous technology; and bureaucratic firms where both owners and workers are pessimists employing a well-known technology. We also suggest how the relative scarcity of the optimists may help to explain the commonly observed S-shaped diffusion profile for successful innovations.
Description
Appeared earlier as CentER DP 2001-021
Date
2011
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
SDG 8 - Decent Work and Economic Growth
Citation
Rigotti, L, Ryan, M & Vaithianathan, R 2011, 'Optimism and firm formation', Economic Theory, vol. 46, no. 1, pp. 1-38. https://doi.org/10.1007/s00199-009-0501-x
License
info:eu-repo/semantics/restrictedAccess