Adverse Selection and Entrepreneurship in a Model of Development

This paper presents a theory in which talented entrepreneurs are identified as the key agents driving the process of development and modernisation. Entrepreneurial skills are private information, which prevents full risk sharing. Development into a modern industrial economy might fail to take place, since potentially talented entrepreneurs may refrain from taking on the entrepreneurial risks as a way to avoid income shocks. An interesting feature of the model is the fact that the informational asymmetries are endogenous to the process of development, as they are related to the heterogeneity in entrepreneurial skills required in the manufacturing activities.