Entrepreneurship, asymmetric information, and unemployment

We examine how three sources of asymmetric information affect the supply of entrepreneurs and unemployment. In the first case, banks cannot observe en trepreneurs' risk of failure so ration credit. This increases the number of entrepreneurs and the level of unemployment. In the second case, firms can not observe workers' effort so offer a wage above the market clearing one. This results in unemployment and too few entrepreneurs. The final case aris es when firms cannot observe workers' abilities. A pooling wage is offered and results in too many entrepreneurs. The role of government in restoring efficiency is explored.