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...

•Since 2000 Italy’s GDP growth has been below the Euro-area average, and total factor productivity growth has been very weak, and at times, negative (OECD, 2005)•The labour market is highly regulated and inflexible.•Italy has experienced high levels of immigration in recent years,...