Entrepreneurial talent, occupational choice, and trickle up policies

We study market inefficiencies and policy remedies when agents choose their occupations, and entrepreneurialtalent is subject to private information. Untalented entrepreneurs depress the returns to entrepreneurshipbecause of adverse selection. The severity of this problem depends on the outside option ofentrepreneurs, which is working for wages. This links credit, product and labor markets. A rise in wagesreduces the adverse selection problem. These multimarket interactions amplify productivity shocks and maygenerate multiple equilibria. If it is impossible to screen entrepreneurs then all agents unanimously supporta tax on entrepreneurs that drives out the less talented ones. However, if screening is possible, e.g.,if wealthy entrepreneurs can provide collateral for their loans, then wealthy entrepreneurs do not supportsurplus enhancing taxes.[...]