Private Information and Endogenous Entry

Abstract

We assume an organization made up of a principal and an agent in which the agent privately observes the state of nature. The agent can use his private information to set up a new firm (endogenous entry) with a positive fixed cost. We show that, in equilibrium, there is effective endogenous entry If the cost of entry the agent must bear to establish a new firm is low enough, as the agent has better information about the state of nature than the principal.