Task Discretion, Labor-market Frictions, and Entrepreneurship†

An agent can perform a job in several ways, which we call tasks. Choosing agents' tasks is the prerogative of management within firms, and of agents themselves if they are entrepreneurs. While agents' comparative advantage at different tasks is unknown, it can be learned by observing their performance. However, tasks that generate more information could lead to lower short-term profits. Hence, firms will allocate workers to more informative tasks only if agents cannot easily move to other firms. When, instead, workers can easily move to other firms, agents may prefer to become entrepreneurs and acquire task discretion, even if their short-term payoff is lower than employees. Our model generates novel predictions with respect to, for example, how the wage dynamics of agents who switch between entrepreneurship and employment are affected by labor and contracting frictions. (JEL D83, J24, J62, J63, L26, M13).