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The entrepreneurial rent: the value of and compensation for entrepreneurship

Author

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  • Magnus Henrekson
  • Mikael Stenkula

Abstract

Purpose - The purpose of this paper is to show that entrepreneurship can be fruitfully analyzed by positing that entrepreneurs are searching for rates of return exceeding the risk-adjusted market rate of return, i.e., they try to create or discover economic rents. Design/methodology/approach - A conceptual paper trying to bridge the gap between neoclassical economics and the entrepreneurship field by seeing entrepreneurship as the search for and creation of (entrepreneurial) rents. Findings - In the short to medium term the search for and creation of entrepreneurial rents give rise to supernormal profits if successful. In the longer term these rents are dissipated and accrue to society at large as cheaper and better products. Entrepreneurial rents are crucial for bringing about the innovation and continuous structural change required to generate economic growth. Practical implications - The search for entrepreneurial rents is crucial for economic development. Without the possibility to earn entrepreneurial rents, no entrepreneur would be willing to exercise entrepreneurship and exploit entrepreneurial opportunities. Successful entrepreneurship attracts imitating firms that push back profits to normal levels and the benefits of the innovation will be diffused to consumers. Social implications - Understanding the role of entrepreneurship and its compensation is crucial for analyses of potential policy measures. Highex postcompensation for successful entrepreneurship cannot be taxed harshly without affecting entrepreneurs’ willingness to supply effort. Originality/value - The entrepreneurial function and its compensation are often neglected in neoclassical economics. This is a major shortcoming, as the presence of and search for entrepreneurial rents are necessary for bringing about the innovation and structural change that result in economic growth.

Suggested Citation

  • Magnus Henrekson & Mikael Stenkula, 2017. "The entrepreneurial rent: the value of and compensation for entrepreneurship," Journal of Entrepreneurship and Public Policy, Emerald Group Publishing Limited, vol. 6(1), pages 11-25, April.
    • Handle: RePEc:eme:jepppp:jepp-07-2016-0027
    DOI: 10.1108/JEPP-07-2016-0027
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    References listed on IDEAS

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    1. Henrekson, Magnus & Sanandaji, Tino, 2013. "Small Business Activity Does not Measure Entrepreneurship," Working Paper Series 959, Research Institute of Industrial Economics, revised 26 Jan 2014.
    2. Philippe Aghion & Ufuk Akcigit & Antonin Bergeaud & Richard Blundell & David Hemous, 2019. "Innovation and Top Income Inequality," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 86(1), pages 1-45.
    3. G. M.P. Swann, 2009. "The Economics of Innovation," Books, Edward Elgar Publishing, number 13211.
    4. Nicolai J. Foss & Peter G. Klein (ed.), 2002. "Entrepreneurship and the Firm," Books, Edward Elgar Publishing, number 2377.
    5. Philippe Aghion & Richard Blundell & Rachel Griffith & Peter Howitt & Susanne Prantl, 2009. "The Effects of Entry on Incumbent Innovation and Productivity," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 20-32, February.
    6. William J. Baumol, 2013. "The Microtheory of Innovative Entrepreneurship," Journal of Economic Sociology, National Research University Higher School of Economics, vol. 14(3), pages 96-108.
    7. Peter Lewin & Steven E. Phelan, 2002. "Rents and Resources: A Market Process Perspective," Chapters, in: Nicolai J. Foss & Peter G. Klein (ed.), Entrepreneurship and the Firm, chapter 11, Edward Elgar Publishing.
    8. Nelson, Richard R, 1973. "Recent Exercises in Growth Accounting: New Understanding or Dead End?," American Economic Review, American Economic Association, vol. 63(3), pages 462-468, June.
    9. Knudsen Thorbjørn & Swedberg Richard, 2009. "Capitalist Entrepreneurship: Making Profit through the Unmaking of Economic Orders," Capitalism and Society, De Gruyter, vol. 4(2), pages 1-28, October.
    10. Alvarez, Sharon A., 2005. "Theories of Entrepreneurship: Alternative Assumptions and the Study of Entrepreneurial Action," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 1(3), pages 105-148, June.
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    Cited by:

    1. Heira Georgina Valdez-Bocanegra & Gonzalo Maldonado-Guzmán & Carmen Castrejón-Mata, 2020. "The Entrepreneurial Orientation and its Impact on Competitiveness and Growth: Empirical Evidence in the State of Aguascalientes in Mexico," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 10(3), pages 1-6.
    2. Louis Rouanet, 2022. "Competition is (still) a tough weed: A review essay of Thomas Philippon’s The great reversal: How America gave up on free markets," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 35(1), pages 115-128, March.
    3. Louis Rouanet, 0. "Competition is (still) a tough weed: A review essay of Thomas Philippon’s The great reversal: How America gave up on free markets," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 0, pages 1-14.

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    More about this item

    Keywords

    Innovation; Entrepreneurship; Imitation; Economic rent; Entrepreneurial rent; D51; J30; L26; O31;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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