SFB 303 Discussion Paper No. A - 557

Author: Grüner, Hans Peter
Title: Redistribution as a Selection Device
Abstract: This paper argues that the redistribution of initial endowments of capital can increase an economy's surplus because it leads the market to select talented individuals as entrepreneurs. In my model an agent's entrepreneurial ability is his private information. Moral hazard in production creates rents for entrepreneurs if they are believed to be both talented and willing to provide entrepreneurial effort. I find conditions such that unproductive rich entrepreneurs crowd out productive poor ones and I identify cases where redistribution leads to the selection of better entrepreneurs and increases the economy's surplus.
Keywords: firm-ownership, education, moral hazard, adverse selection, selection of entrepreneurs
JEL-Classification-Number: D31, H23, H32
Creation-Date: October 1997
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