When labor mobility is imperfect, employers (firms) will invest in the discovery of their employees’ talent at different tasks; in this case, agents become entrepreneurs only if they have a valuable business idea or cannot find employment. If instead employees can easily move to other firms, employers have little incentive to invest in talent discovery. In this case, an additional motive for entrepreneurship emerges: learning one’s comparative advantage over tasks. We develop such a model and show a causal relationship between the degree of labor-market frictions and the level of entrepreneurial activity; the value of entrepreneurial failures; the payoff of entrepreneurs relative to workers; the wage of former entrepreneurs relative to former workers; the degree of firms’ short-termism; the rate of within-firm talent discovery. The theoretical correlations between these variables are consistent with the evidence available for the US and continental Europe.
This is an extended revision of “The value of entrepreneurial failures: Task Allocation and Career Concerns”, CEPR DP 11295, 2016 by the same authors.