Private Information and Endogenous Entry

Juan Carlos Bárcena-Ruiz ; Jesús Rubio

Lecturer, Departamento de Fundamentos del Analisis Economico I, Universidad del Pais Vasco, Avenida Lehendakari Aguirre 83, 48015 Bilbao, Spain, Tel: +34-946013829, Fax: +34-946013891 jepbaruj@bs.ehu.es
Lecturer, Departamento de Economia Aplicada III, Universidad del Pais Vasco, Avenida Lehendakari Aguirre 83, 48015 Bilbao, Spain, Tel: +34- 946013826, Fax: 34+946013754 etprupej@bs.ehu.es

JEL Classification: L2, L22, D82

Abstract

We assume an organization made up of a principal and an agent in which the agent privately observes the state of nature. The agent can use his private information to set up a new firm (endogenous entry) with a positive fixed cost. We show that, in equilibrium, there is effective endogenous entry if the cost of entry the agent must bear to establish a new firm is low enough, as the agent has better information about the state of nature than the principal.

Keywords:

Endogenous entry, Private information

Acknowledgments

We thank referees for helpful comments. Financial support from Ministerio de Ciencia y Tecnolog a and FEDER (BEC2003-04430), UPV (HB-8238/ 2000) and UPV (Subvencion a grupos, 2001) is gratefully acknowledged.

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