To the list of articles27 september 2002
Institutions for the Selection of Entrepreneurs: Implications for Economic Growth and Financial Crises
Economic growth is seen to depend upon actions of entrepreneurs, and these actions upon the prevailing institutions. While institutions have often been examined for influences upon the freedoms and the incentives of entrepreneurs, and thereby upon the level of employment of resources, this paper examines their influences upon the selection of entrepreneurs, and thereby upon the efficiency of that employment. This selection is crucial in the realistic but in theory seldom considered cases in which all agents, including entrepreneurs, may differ in economic abilities (bounds of rationality). A simple model shows that in the long run, selection by market competition, especially when extended to financial markets, vastly outperforms selection controlled or protected politically. Such selection may outperform market selection only during a limited period, extendable only at the price of growing bad debts and financial crises.