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Optimism and firm formation

Publication ,  Journal Article
Rigotti, L; Ryan, M; Vaithianathan, R
Published in: Economic Theory
January 1, 2011

This paper analyses firm formation and innovation in an economy where agents differ with respect to their optimism in the face of ambiguity. Individuals choose between starting a firm or working in one; and also between employing a traditional technology or a new technology about which little is known. In the face of ambiguity, decision-makers are either optimistic or pessimistic. We study the innovation-proof equilibria of the economy: wages clear all labor markets when agents make optimal occupational choices, and no mutually beneficial opportunity for innovation remains unexploited. In equilibrium, optimists are more likely to form firms, but also more likely to be workers in firms using the ambiguous technology. This phenomenon sheds new light on the relationship between firm culture and technology. We find that three types of firms emerge in equilibrium: entrepreneurial firms, where both owners and workers are optimists operating a highly ambiguous technology; traditional firms, where an optimistic owner employs a pessimistic worker and uses a less ambiguous technology; and bureaucratic firms where both owners and workers are pessimists employing a well-known technology. We also suggest how the relative scarcity of the optimists may help to explain the commonly observed S-shaped diffusion profile for successful innovations. © 2009 Springer-Verlag.

Duke Scholars

Published In

Economic Theory

DOI

EISSN

1432-0479

ISSN

0938-2259

Publication Date

January 1, 2011

Volume

46

Issue

1

Start / End Page

1 / 38

Related Subject Headings

  • Economic Theory
  • 3803 Economic theory
  • 3801 Applied economics
  • 3502 Banking, finance and investment
  • 1403 Econometrics
  • 1402 Applied Economics
  • 1401 Economic Theory
 

Citation

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ICMJE
MLA
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Rigotti, L., Ryan, M., & Vaithianathan, R. (2011). Optimism and firm formation. Economic Theory, 46(1), 1–38. https://doi.org/10.1007/s00199-009-0501-x
Rigotti, L., M. Ryan, and R. Vaithianathan. “Optimism and firm formation.” Economic Theory 46, no. 1 (January 1, 2011): 1–38. https://doi.org/10.1007/s00199-009-0501-x.
Rigotti L, Ryan M, Vaithianathan R. Optimism and firm formation. Economic Theory. 2011 Jan 1;46(1):1–38.
Rigotti, L., et al. “Optimism and firm formation.” Economic Theory, vol. 46, no. 1, Jan. 2011, pp. 1–38. Scopus, doi:10.1007/s00199-009-0501-x.
Rigotti L, Ryan M, Vaithianathan R. Optimism and firm formation. Economic Theory. 2011 Jan 1;46(1):1–38.
Journal cover image

Published In

Economic Theory

DOI

EISSN

1432-0479

ISSN

0938-2259

Publication Date

January 1, 2011

Volume

46

Issue

1

Start / End Page

1 / 38

Related Subject Headings

  • Economic Theory
  • 3803 Economic theory
  • 3801 Applied economics
  • 3502 Banking, finance and investment
  • 1403 Econometrics
  • 1402 Applied Economics
  • 1401 Economic Theory