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What do Small Businesses Do?

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Author Info

  • Erik Hurst
  • Benjamin Wild Pugsley

Abstract

In this paper, we show that most small business owners are very different from the entrepreneurs that economic models and policy makers often have in mind. Using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing market. Further, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings.

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Bibliographic Info

Article provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.

Volume (Year): 43 (2011)
Issue (Month): 2 (Fall) ()
Pages: 73-142

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Handle: RePEc:bin:bpeajo:v:43:y:2011:i:2011-02:p:73-142

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Keywords: small business; behavior; policy implications;

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Cited by:
  1. Edward L. Glaeser & Sari Pekkala Kerr & William R. Kerr, 2012. "Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines," Harvard Business School Working Papers 13-015, Harvard Business School.
  2. Colleen Kamen & Christopher Behrer, 2012. "Navigating uncertainty and growing jobs: considering small employer firm resilience during challenging economic times," Community Development Investment Center Working Paper 2012-06, Federal Reserve Bank of San Francisco.
  3. Bengtsson, Ola & Hand, John R. M., 2012. "Employee Compensation in Entrepreneurial Companies," Working Paper Series 922, Research Institute of Industrial Economics.

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