List of figures page ........................................... xv
List of tables ................................................ xvi
Preface ...................................................... xvii
1 Introduction ................................................. 1
1.1 What economics adds to the study of entrepreneurship .... 2
1.2 Coverage and structure of the book ...................... 5
1.3 Defining and measuring entrepreneurship ................. 6
1.3.1 New venture creation and nascent entrepreneurs ... 7
1.3.2 Small firms ..................................... 10
1.3.3 Self-employment/business ownership .............. 10
1.3.4 Appraisal ....................................... 15
1.4 International evidence about entrepreneurship rates
in developed countries ................................. 15
1.5 The transition economies of Eastern Europe ............. 19
1.6 Developing countries ................................... 22
1.7 Appendix: habitual entrepreneurs ....................... 24
Part I Selection .............................................. 29
2 Theories of entrepreneurship ................................ 31
2.1 'Early' theories of entrepreneurship ................... 32
2.2 The occupational choice model of entrepreneurship I:
homogeneous agents ..................................... 36
2.2.1 Definitions of risk aversion and risk ........... 37
2.2.2 Simple static models ............................ 38
2.2.3 Dynamic models .................................. 39
2.3 The occupational choice model II: heterogeneous
ability - the Lucas (1978) model ....................... 41
2.3.1 The Lucas model .................................. 41
2.3.2 Criticisms of the Lucas model ................... 43
2.3.3 Variants and extensions of the Lucas model ...... 44
2.4 The occupational choice model III: heterogeneous risk
attitudes - the Kihlstrom and Laffont (1979) model ..... 49
2.5 The very existence of an entrepreneurial option ........ 51
2.5.1 Theory of the firm considerations ............... 52
2.5.2 Non-profit-maximising ventures .................. 57
2.6 Incumbents' characteristics: entrepreneurial
spawning ............................................... 61
2.6.1 Organisational limitations of incumbent firms ... 63
2.6.2 Agency cost theories ............................ 65
2.6.3 Learning theories ............................... 67
2.7 Macroeconomic theories of entrepreneurship and
growth ................................................. 67
2.7.1 Wealth-based theories ........................... 68
2.7.2 Technology-based theories ....................... 70
2.7.3 Knowledge-based theories ........................ 72
2.8 Multiple equilibrium models ............................ 74
2.9 Conclusion ............................................. 76
2.10 Appendices ............................................. 77
2.10.1 Technical definitions of risk aversion and
risk ............................................ 77
2.10.2 A simple 'hire or outsource' model .............. 79
2.10.3 Landier's serial entrepreneurship multiple
equilibrium model ............................... 81
2.10.4 Parker's human capital multiple equilibrium
model ........................................... 82
3 Empirical methods in entrepreneurship research .............. 86
3.1 Cross-section regression models: sample selection
bias and IV ............................................ 87
3.1.1 Sample selection bias ........................... 87
3.1.2 Endogeneity and IV .............................. 88
3.2 Cross-section binary models of occupational choice ..... 90
3.3 Extensions of the cross-section binary model ........... 92
3.3.1 The inclusion of relative incomes ............... 92
3.3.2 Multiple occupational choices ................... 94
3.3.3 Multiple equation systems ....................... 94
3.3.4 Non-binary occupational choices ................. 96
3.3.5 Heteroscedastic probit .......................... 96
3.4 Time-series models ..................................... 96
3.5 Panel-data models ...................................... 98
3.6 Entrepreneurial duration models ....................... 100
3.7 Appendices ............................................ 101
3.7.1 The reduced form of the two-equation
simultaneous equation model .................... 101
3.7.2 Fraser and Greene's (2006) heteroscedastic
probit model ................................... 102
4 Evidence about the determinants of entrepreneurship ........ 106
4.1 Pecuniary and non-pecuniary incentives ................ 107
4.1.1 Pecuniary incentives: relative earnings ........ 109
4.1.2 Desire for independence and job satisfaction ... 110
4.2 Human capital ......................................... 113
4.2.1 Age ............................................ 113
4.2.2 Experience ..................................... 115
4.2.3 Formal education ............................... 117
4.3 Social capital ........................................ 119
4.4 Risk attitudes, over-optimism and other
psychological traits .................................. 121
4.4.1 Risk attitudes and risk ........................ 121
4.4.2 Over-optimism and over-confidence .............. 124
4.4.3 Other psychological trait variables ............ 128
4.5 Demographic and industry characteristics .............. 132
4.5.1 Marital status ................................. 132
4.5.2 Health issues .................................. 133
4.5.3 Family background .............................. 134
4.5.4 Industry characteristics ....................... 138
4.6 Macroeconomic factors ................................. 139
4.6.1 Technology as a determinant of
entrepreneurship ............................... 139
4.6.2 Knowledge spillovers and growth ................ 140
4.6.3 Entrepreneurship and the business cycle ........ 142
4.6.4 Unemployment ................................... 143
4.6.5 Regional factors ............................... 147
4.7 Nascent entrepreneurship .............................. 151
4.7.1 Characteristics of nascent entrepreneurs ....... 151
4.7.2 Venture development paths of nascent
entrepreneurs .................................. 152
4.8 Dependent starts and firm characteristics ............. 155
4.9 Conclusion ............................................ 157
5 Ethnic entrepreneurship and immigration .................... 163
5.1 Discrimination ........................................ 165
5.1.1 Discrimination in the labour market ............ 165
5.1.2 Discrimination in the capital market ........... 166
5.1.3 Discrimination in the product market ........... 170
5.2 Positive factors ...................................... 171
5.2.1 Positive expected relative returns in
entrepreneurship ............................... 171
5.2.2 Ethnic enclaves ................................ 172
5.2.3 Culture ........................................ 173
5.2.4 Role models and inculcation of positive
attitudes ...................................... 174
5.3 Further evidence on determinants of ethnic
differences in entrepreneurship ....................... 174
5.4 Immigration and entrepreneurship ...................... 176
5.4.1 Immigrants' entrepreneurial propensities ....... 176
5.4.2 The determinants of immigrant
entrepreneurship ............................... 177
5.4.3 The effects of immigration on
entrepreneurship ............................... 180
5.5 Appendix .............................................. 181
5.5.1 The Borjas (1986) decomposition ................ 181
6 Female entrepreneurship .................................... 184
6.1 Some basic facts about female entrepreneurship ........ 184
6.2 Family factors ........................................ 187
6.2.1 Marriage and household production .............. 187
6.2.2 The impact of children ......................... 188
6.3 Performance of women entrepreneurs .................... 189
6.3.1 The gender earnings gap ........................ 190
6.3.2 Explanations of the earnings gap ............... 191
6.3.3 Other performance gaps: growth and survival
rates .......................................... 194
6.4 Women and entrepreneurial finance ..................... 195
6.5 Conclusion ............................................ 197
Part II Financing ............................................. 201
7 Debt finance for entrepreneurial ventures .................. 203
7.1 Background and useful terminology ..................... 205
7.1.1 Background ..................................... 205
7.1.2 Terminology .................................... 209
7.2 Theories of credit rationing and redlining ............ 212
7.2.1 Type I credit rationing ........................ 212
7.2.2 Type II credit rationing, redlining and
under-investment ............................... 212
7.3 Rebuttals of the credit rationing hypothesis and
counter-rebuttals ..................................... 216
7.3.1 Rebuttals ...................................... 216
7.3.2 Counter-rebuttals .............................. 221
7.4 Over-investment ....................................... 223
7.4.1 The de Meza and Webb (1987) over-investment
model .......................................... 223
7.4.2 Over-optimism .................................. 225
7.5 Conclusion ............................................ 226
7.6 Appendices ............................................ 228
7.6.1 Bernhardt's (2000) model of Type I rationing ... 228
7.6.2 Stiglitz and Weiss' (1981) model of Type II
credit rationing ............................... 229
7.6.3 Bester's (1985a) screening model ............... 230
8 Venture capital and other sources of finance ............... 234
8.1 Venture capital and entrepreneurs ..................... 235
8.1.1 Organisational structure ....................... 235
8.1.2 Size of the entrepreneurial venture capital
market ......................................... 238
8.2 Advantages of venture capital finance for
entrepreneurs ......................................... 239
8.2.1 Value-adding activities by VCs ................. 239
8.2.2 Equity finance as an optimal financial
contract ....................................... 242
8.3 Drawbacks of venture capital and equity finance for
entrepreneurs ......................................... 244
8.3.1 Factors inhibiting the use of equity finance ... 244
8.3.2 Equity rationing, funding gaps and under-
investment ..................................... 246
8.4 Informal equity finance: business angels .............. 248
8.5 Other informal sources of finance ..................... 250
8.5.1 Family finance ................................. 250
8.5.2 Micro-finance schemes .......................... 251
8.5.3 Other non-profit-making lending organisations
and schemes .................................... 257
8.5.4 Co-operative schemes ........................... 257
8.5.5 Trade credit ................................... 259
8.6 Conclusion ............................................ 261
9 Wealth and entrepreneurship ................................ 263
9.1 The role of entrepreneurs in aggregate wealth
accumulation and inequality ........................... 264
9.2 The 'private equity premium puzzle' ................... 266
9.3 Entrepreneurial wealth diversification ................ 268
9.4 Wealth and entrepreneurship: theories ................. 269
9.4.1 The Evans and Jovanovic (1989) model ........... 269
9.4.2 The Banerjee and Newman (1993) model ........... 271
9.4.3 The Aghion and Bolton (1997) model ............. 272
9.4.4 Newman's (2007) moral hazard model ............. 272
9.5 Wealth and entrepreneurship: evidence ................. 273
9.6 Alternative interpretations of a wealth/
entrepreneurship relationship ......................... 275
9.7 Wealth and performance in entrepreneurship ............ 279
9.7.1 Effects of wealth on venture survival .......... 279
9.7.2 Effects of wealth on venture investment
decisions ...................................... 280
9.7.3 Borrowing constraints and profitability ........ 280
9.8 Evidence relating to Type II credit rationing ......... 281
9.8.1 What does not constitute evidence of credit
rationing ...................................... 282
9.8.2 Berger and Udell's (1992) approach ............. 282
9.8.3 Other evidence ................................. 283
9.9 Conclusion ............................................ 284
9.10 Appendices ............................................ 285
9.10.1 Preferences for skewness and
entrepreneurship ............................... 285
9.10.2 The Paulson et al. (2006) structural model ..... 286
Part III Performance .......................................... 291
10 Entrepreneurship, job creation and innovation .............. 293
10.1 Job creators .......................................... 293
10.1.1 Some basic facts about entrepreneurs' labour
demand ......................................... 293
10.1.2 Theoretical analysis ........................... 294
10.1.3 Evidence ....................................... 295
10.2 Job creation by small firms ........................... 297
10.3 Innovation by small firms ............................. 300
10.3.1 Theoretical arguments .......................... 301
10.3.2 Evidence about innovation ...................... 303
10.4 Conclusion ............................................ 305
10.5 Appendix .............................................. 306
10.5.1 Carroll et al.'s (2000a) model of labour
demand and taxation ............................ 306
11 Entrepreneurship and growth ................................ 310
11.1 Theories of venture growth ............................ 311
11.1.1 Gibrat's Law ................................... 311
11.1.2 Jovanovic's (1982) model of industry
selection ...................................... 312
11.1.3 Innovation, growth and shakeouts ............... 314
11.1.4 Other theories of growth ....................... 315
11.2 Evidence about the growth of entrepreneurial
ventures .............................................. 316
11.2.1 Definitional and measurement issues ............ 317
11.2.2 Evidence about determinants of venture
growth ......................................... 319
11.3 Entrepreneurship and economic growth .................. 324
11.4 Appendix .............................................. 330
12 Entrepreneurial effort ..................................... 333
12.1 Unproductive and destructive entrepreneurship ........ 334
12.1.1 Conceptual issues .............................. 334
12.1.2 Evidence ....................................... 338
12.2 Work effort ........................................... 340
12.2.1 Hours of work .................................. 341
12.2.2 Explaining entrepreneurs' work hours ........... 343
12.3 Ageing, retirement and entrepreneurship ............... 351
12.4 Entrepreneurial learning .............................. 356
12.5 Appendices ............................................ 357
12.5.1 Frank's model of entrepreneurs' labour
supply and ageing .............................. 357
12.5.2 Parker and Rougier' s model of the
entrepreneurial retirement decision ............ 359
13 Entrepreneurs' incomes and returns to human capital ........ 363
13.1 Measurement issues: tax evasion and income under-
reporting ............................................. 364
13.2 Other measurement problems ............................ 368
13.3 Evidence relating to entrepreneurs' relative
incomes ............................................... 369
13.4 The inequality and volatility of entrepreneurs'
incomes ............................................... 372
13.5 Determinants of entrepreneurs' incomes: theory and
methods ............................................... 375
13.6 Determinants of entrepreneurs' incomes: findings ...... 378
13.6.1 Entrepreneurs' rate of return to education ..... 378
13.6.2 Other explanatory variables and extensions ..... 380
14 Survival ................................................... 385
14.1 Closure is not necessarily failure .................... 386
14.2 Survival rates and their distribution ................. 388
14.3 Theoretical determinants of survival .................. 389
14.3.1 The liabilities of newness and smallness ....... 389
14.3.2 Other factors .................................. 391
14.4 Empirical determinants of survival .................... 391
14.5 Conclusion ............................................ 396
Part IV Public policy ......................................... 401
15 Principles of entrepreneurship policy ...................... 403
15.1 The case for and against pro-entrepreneurship public
policies .............................................. 405
15.1.1 The case for pro-entrepreneurship policies ..... 405
15.1.2 The case against pro-entrepreneurship
policies ....................................... 407
15.2 Principles of entrepreneurship policy design .......... 408
15.3 Entrepreneurship policy evaluation .................... 409
16 Finance and innovation policies ............................ 412
16.1 Loan guarantee schemes ................................ 412
16.1.1 Organisation of LGSs ........................... 412
16.1.2 Theoretical perspectives on LGSs ............... 413
16.1.3 Evaluation of LGSs ............................. 415
16.2 Other credit market interventions ..................... 417
16.3 Policies to promote equity finance .................... 418
16.3.1 Regulatory policies ............................ 419
16.3.2 Taxation policies .............................. 421
16.4 Innovation policy and entrepreneurship ................ 423
16.5 Appendix: the Keuschnigg-Nielsen (2004a, 2006)
double moral hazard model ............................. 425
17 Taxation, regulation and other policies .................... 428
17.1 Taxation .............................................. 428
17.1.1 Income and payroll taxes: theoretical issues ... 429
17.1.2 Income and payroll taxes: empirical evidence ... 433
17.1.3 Corporation tax ................................ 436
17.1.4 Wealth and inheritance taxes ................... 437
17.2 Labour and product market schemes .................... 438
17.2.1 Employment assistance schemes .................. 438
17.2.2 Procurement and affirmative action schemes ..... 440
17.2.3 Business advice and assistance ................. 440
17.3 Regulation ............................................ 442
17.3.1 The regulation of entry ........................ 442
17.3.2 The regulation of exit (bankruptcy) ............ 446
17.3.3 Property rights and corporate governance ....... 448
17.3.4 The regulation of employment ................... 450
17.3.5 The regulation of credit markets ............... 451
17.3.6 Costs of compliance with regulations ........... 453
17.3.7 Conclusions .................................... 454
17.4 The welfare state, trade unions, enterprise culture
and instability ....................................... 455
17.4.1 The size of the welfare state .................. 455
17.4.2 Social security transfers and trade unions ..... 457
17.4.3 Fostering an enterprise culture ................ 457
17.4.4 Political and economic instability ............. 458
17.5 Conclusion ............................................ 459
References .................................................... 466
Index ......................................................... 541
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