We examine how three sources of asymmetric information affect the supply of
entrepreneurs and unemployment. In the first case, banks cannot observe en
trepreneurs' risk of failure so ration credit. This increases the number of
entrepreneurs and the level of unemployment. In the second case, firms can
not observe workers' effort so offer a wage above the market clearing one.
This results in unemployment and too few entrepreneurs. The final case aris
es when firms cannot observe workers' abilities. A pooling wage is offered
and results in too many entrepreneurs. The role of government in restoring
efficiency is explored.