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What determines entrepreneurial clusters?

  • Luigi Guiso

    (European University Institute, EIEF and CEPR)

  • Fabiano Schivardi

    (University of Cagliari, EIEF and CEPR)

We contrast two potential explanations of the substantial differences in entrepreneurial activity observed across geographical areas: entry costs and external effects. We extend the Lucas model of entrepreneurship to allow for heterogeneous entry costs and for externalities that shift the distribution of entrepreneurial talents. We show that these assumptions have opposite predictions on the relation between entrepreneurial activity and firm level TFP: with different entry costs, in areas with more entrepreneurs firms' average productivity should be lower; with heterogeneous external effects it should be positive. We test these implications on a sample of Italian firms and unambiguously reject the entry costs explanation in favor of the externalities one. We also investigate the sources of external effects, finding robust evidence that learning externalities are an important determinant of cross-sectional differences in entrepreneurial activity.

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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 0806.

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Length: 35 pages
Date of creation: 2008
Date of revision: May 2008
Handle: RePEc:eie:wpaper:0806
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