Entrepreneurial Innovation

This paper constructs an equilibrium model of entrepreneurial innovation where individuals differ in their attitude toward uncertainty. Unlike previous models of innovation, the firm-formation process is endogenous. An entrepreneur, who owns residual profits, utilizes an uncertain technology and hires a worker who may only be partially isolated from uncertainty. While the available production technologies are exogenously specified, the technologies that operate in equilibrium are endogenous, depending on both the entrepreneur's prior beliefs about the profitability of the technology, as well as the worker's willingness to work with the uncertain technology. The general equilibrium setting allows us to explore the impact of innovation on the nature of the firm. The relationship between technological uncertainty and the nature of the firm is able to explain the commonly observed S- shaped diffusion profile. As uncertainty falls, firms evolve from being entrepreneurial to corporate, finally becoming bureaucratic.