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Overly Optimistic Entrepreneurs Seek Government Support for Projects that Will Usually Fail




People have a right to be overly-optimistic when they invest their own money in entrepreneurial projects. But governments should be prudent caretakers of the money they have taken from taxpayers. The overly-optimistic bias of subsidy-seeking entrepreneurs weakens the case for government support of entrepreneurial projects.


(p. 259) The optimistic risk taking of entrepreneurs surely contributes to the economic dynamism of a capitalistic society, even if most risk takers end up disappointed. However, Marta Coelho of the London School of Economics has pointed out the difficult policy issues that arise when founders of small businesses ask the government to support them in decisions that are most likely to end badly. Should the government provide loans to would-be entrepreneurs who probably will bankrupt themselves in a few years? Many behavioral economists are comfortable with the "libertarian paternalistic" procedures that help people increase their savings rate beyond what they would do on their own. The question of whether and how government should support small business does not have an equally satisfying answer.


Source:

Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011.





Comments

Russ Roberts drew the same sort of parallel with the housing bubble and financial "foul play". When you're gambling with Uncle Sam's money, your incentives and risk-assessment are completely different when it's your own money. Russ's channeling of Friedman: "[C]apitalism is a profit and loss system. The profits encourage risk taking. The losses encourage prudence. When taxpayers absorb the losses, the distorted result is reckless and imprudent risk taking."

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