We extend Lucas'(1978) by assuming that a fraction of individuals in an economy derive anticipatory utility from entrepreneurship. We show that if these individuals are able to bias their beliefs to inflate the anticipatory benefits they endogenously become optimists. Optimism has six main effects. First, there is a misallocation of talent which lowers output. Second, optimists are more likely to become entrepreneurs than realists. Third, entrepreneurs are more optimistic than workers. Fourth, when the fraction optimists is high, the majority of entrepreneurs are optimists. Fifth, optimism drives up the wage which makes workers better off. Sixth, optimism lowers the returns to entrepreneurship. Joint with Michelle Dell’Era.
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