The Social Dynamics of Entrepreneurship

We present a framework describing the interdependence between entrepreneurial decisions at the individual level and the local amount of entrepreneurial activity. We view the entrepreneur as someone who has the ability to perceive and exploit previously unrecognized profit opportunities. His behavior, we argue, produces the conditions for new markets to develop and, as a consequence, new entrepreneurial opportunities are created. Thus, entrepreneurs act as catalysts of economic activity for the entire economy. In other words, we introduce a distinction between the microeconomic effects of entrepreneurial activity within a specific market and its effects at the aggregate level. Specifically, the goal of this paper is to show that the actual rate of entrepreneurship creates a network externality that, by favoring the concentration of a significant quantity of economic activity and by encouraging alertness, also promotes growth. If, indeed, entrepreneurship creates a network externality, then its effect on the aggregate level of activity exceeds the value of each individual entrepreneurial action, and the contribution of the entrepreneurial sector to economic growth is more than proportional to the relative size of the sector itself.