Entrepreneurship, technological change and endogenous returns to ability

This paper proposes a model of entrepreneurial activity highlighting a non-monotone relationship between technological change and ability-based sorting into entrepreneurial types. Entrepreneurial decisions are examined in a two-stage model under uncertainty in which entrepreneurs decide to abandon a project and start a new venture depending on technological change and on ability. This paper investigates how technological change affects the comparative advantage of entrepreneurs thereby shaping entrepreneurial dynamism. Under exogenous technological change, we show that above a threshold level, rapid technological progress increases the number of entrepreneurs undertaking the most efficient projects in the research stage and decreases the number of entrepreneurs of low-adaptative firms who choose to continue their initial business in the development stage. Technological change, endogenized in a learning-by-doing mechanism reinforces these results. Overall, a higher rate of technological change tends to induce a cleansing effect on entrepreneurial activity and alters the market perception of business creation.