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Skill-Biased Change in Entrepreneurial Technology

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  • Poschke, Markus

    ()
    (McGill University)

Abstract

In contrast to the very large literature on skill-biased technical change among workers, there is hardly any work on the importance of skills for the entrepreneurs who employ those workers, and in particular on their evolution over time. This paper proposes a simple theory of skill-biased change in entrepreneurial technology that fits with cross-country, historical and micro evidence. For this, it introduces two additional features into an otherwise standard occupational choice, heterogeneous firm model à la Lucas (1978): technological change does not benefit all potential entrepreneurs equally, and there is a positive relationship between an individual's potential payoffs in working and in entrepreneurship. If some firms consistently benefit more from technological progress than others, they stay closer to the frontier, and the others fall behind. Because wages rise for all workers, low-productivity entrepreneurs will then at some point exit and become workers. As a consequence, the entrepreneurship rate falls with income per capita, average firm size and firm size dispersion increase with income per capita, and "entrepreneurship out of necessity" falls with income per capita. The paper also documents, for two of the facts for the first time, that these are exactly the relationships prevailing in cross-country data. Quantitatively, the model fits the U.S. experience well. Using the parameters from a calibration to the U.S., the model also explains cross-country patterns quite well.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5202.

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Length: 37 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5202

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Related research

Keywords: occupational choice; entrepreneurship; firm size; firm entry; growth; skill-biased technical change;

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References

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  1. Silvia Ardagna & Annamaria Lusardi, 2008. "Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints," NBER Working Papers 14012, National Bureau of Economic Research, Inc.
  2. Poschke, Markus, 2008. "Who Becomes an Entrepreneur? Labor Market Prospects and Occupational Choice," IZA Discussion Papers 3816, Institute for the Study of Labor (IZA).
  3. Douglas Gollin, 2001. "Nobody's Business but My Own: Self Employment and Small Enterprise in Economic Development," Center for Development Economics, Department of Economics, Williams College 172, Department of Economics, Williams College.
  4. Huw Lloyd-Ellis, 1999. "Endogenous Technological Change and Wage Inequality," American Economic Review, American Economic Association, American Economic Association, vol. 89(1), pages 47-77, March.
  5. Silva, Olmo, 2006. "The Jack-of-All-Trades Entrepreneur: Innate Talent or Acquired Skill?," IZA Discussion Papers 2264, Institute for the Study of Labor (IZA).
  6. William J. Baumol, 2004. "Education for Innovation: Entrepreneurial Breakthroughs vs. Corporate Incremental Improvements," NBER Working Papers 10578, National Bureau of Economic Research, Inc.
  7. Kevin J. Murphy & Ján Zábojník, 2004. "CEO Pay and Appointments: A Market-Based Explanation for Recent Trends," American Economic Review, American Economic Association, American Economic Association, vol. 94(2), pages 192-196, May.
  8. Paul Reynolds & Niels Bosma & Erkko Autio & Steve Hunt & Natalie De Bono & Isabel Servais & Paloma Lopez-Garcia & Nancy Chin, 2005. "Global Entrepreneurship Monitor: Data Collection Design and Implementation 1998–2003," Small Business Economics, Springer, Springer, vol. 24(3), pages 205-231, 02.
  9. Dan Bernhardt & Huw Lloyd-Ellis, 1993. "Enterprise, Inequality and Economic Development," Working Papers, Queen's University, Department of Economics 893, Queen's University, Department of Economics.
  10. Hernan Moscoso Boedo & Toshihiko Mukoyama, 2012. "Evaluating the effects of entry regulations and firing costs on international income differences," Journal of Economic Growth, Springer, Springer, vol. 17(2), pages 143-170, June.
  11. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  12. Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, American Economic Association, vol. 98(3), pages 642-68, June.
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Cited by:
  1. Felbermayr, Gabriel & Jung, Benjamin, 2012. "The home market effect, regional inequality, and intra-industry reallocations," University of Tuebingen Working Papers in Economics and Finance 33, University of Tuebingen, Faculty of Economics and Social Sciences.
  2. Lee, Sang Yoon Tim, 2012. "Entrepreneurs, Managers and Inequality," Working Papers, University of Mannheim, Department of Economics 12-15, University of Mannheim, Department of Economics.
  3. Manuel Garcia-Santana & Roberto Ramos, 2012. "Dissecting The Size Distribution Of Establishments Across Countries," Working Papers, CEMFI wp2012_1204, CEMFI.
  4. Alain Gabler & Markus Poschke, 2013. "Experimentation by Firms, Distortions, and Aggregate Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(1), pages 26-38, January.

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