Asymmetric information, occupational choice and government policy* 


  • * 

    An earlier version of this paper was presented at an ESRC Network of Industrial Economists Conference at Merton College, Oxford. The author is grateful to David de Meza and two anonymous referees for exceptionally thorough and helpful reports; the usual disclaimer applies. This paper is dedicated to the memory of Brian Hillier.


A model of credit markets under asymmetric information is proposed in which individuals differ in abilities that are valued in both entrepreneurship and paid employment. Unlike the heterogeneous ability model of de Meza and Webb (1987), over-investment is not inevitable: under-investment and credit rationing can occur instead. This result depends on the novel possibility of there being greater separation of types in paid employment than in entrepreneurship. The model allows individuals to be monitored in both occupations, and permits derivation of the conditions under which the novel possibility holds. The role of corrective government policies is also discussed.