Relative Wealth Concerns and Entrepreneurship
We develop a model of entrepreneurship in which market frictions limit the possibilities for diversifying entrepreneurial risk. A concern for relative standing arises even though individuals consume only standard commodities. In contrast to complete markets, an increase in sector-specific aggregate risk increases entrepreneurship due to relative wealth concerns. A change in the profile of the economy to include more risk-averse people results in an even greater increase in entrepreneurship. Thus relative wealth concerns mitigate the reduction in entrepreneurship arising from the non-diversifiability of entrepreneurial risk. We examine the effects of uncertainty about economic policies such as market-based reforms on entrepreneurship.