| Sumario: | The writer examines the conditions under which the practice of small business owners working for themselves and only employing relatives and friends is an economic outcome, and he considers the link between this outcome and unemployment. He constructs a model of a credit market and its associated labor market and shows that small firms are subject to financial constraints that are supported by information asymmetries. Furthermore, he illustrates that, in a constrained equilibrium, sole proprietorship and unemployment arise from an information imperfection in the credit market that renders the consummation of mutually beneficial contracts in the labor market infeasible. He concludes that policies designed to circumvent information barriers faced by small businesses could materially improve the economic welfare of particular labor force groups.
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