Cash, Reputation and Entrepreneurship

Abstract

In this paper, we analyze how credit rationing in the market for funds induces would-be entrepreneurs both to build or preserve a good reputation and to accumulate cash through the projects they realize. More specifically, we consider employees who have the perspective of establishing their own enterprise in the future. We study their willingness to let the market learn information regarding their talent by choosing more or less informative projects. This choice impacts their incentives to exert effort, which determines their wages, and in turn the financial assets they can invest in their venture. We show that accumulating cash resources can conflict with maintaining a good reputation, and that employees adopt a different strategy depending on their initial reputation and the attractiveness of establishing a firm.