CQ 2: Is there a relation between an entrepreneur's skill set and business size
10 important questions on CQ 2: Is there a relation between an entrepreneur's skill set and business size
What 4 things make up the 'Lucas model'?
- Choice: entrepreneurship versus wage-work
- No risk: returns and wages known in advance
- Individuals are economically rational
- Individuals make decisions that bring the greater utility
- Homogeneous agents: different abilities
- your ability on a scale from 0-10?
What 2 aspects are related to the 'Lucas model'?
- Entrepreneurial ability x (born with or acquired)
- Assumption: abilities are known and fixed
- More able entrepreneurs produce more
- Profits pi given ability x
- Instead of producing output q, the entrepreneur produces xq
- Costs remain the same: pi(x) = xq - c
- For the marginal entrepreneur with ability xsnorretje it holds the pi(xsnorretje) = xsnorretjeq - c = w
What are 2 implications of Lucas model?
- More able entrepreneurs run larger firms
- Entrepreneurs' demand for labor and capital are greater among those with higher ability x
- Lucas (1978): If firm growth (rate) is dependent of firm size (Gibrat's law), small businesses will disappear eventually
- Relative growth versus absolute growth
- Day-dreaming about the small restaurant he frequently visits... This restaurant will probably become part of a large restaurant restaurant chain
- Good prediction? (Managed versus entrepreneurial economy)
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What does more entrepreneurial ability in a country implies? (3)
- Higher demand for wage-workers, hence higher wages
- Higher xsnorretje, hence less entrepreneurs (with larger firms)
- 'Optimal' business ownership rate decreases with a country's level of entrepreneurial ability
What are the implications of the research from Van Praag & Van Stel (2013)? (2)
- 'Optimal' business ownership rate decreases with a country's education level
- More is not always merrier: not everyone should be an entrepreneur!
- 'Optimal' average firm size increases with a country's education level
- Authors: Entrepreneurship education programs should not only focus on entrepreneurship but also on entrepreneurship
- The behavioural notion of entrepreneurship versus the occupational notion of entrepreneurship
What happens if the number of skills needed in particular industry increases? (2)
- Balance becomes more difficult to achieve
- Less entrepreneurs
What is the balance for an insurance agency? (4)
- Understanding insurance policies and managerial skills
- Skills probably correlated
- Many well equipped to run own agency
- Many agencies of small size
What is the balance for an artist? (2)
- Artistic and managerial skills quite distinct
- Few artists running their own gallery
What is a 'balanced' investment strategy? (3)
- Those who are going to specialise (wage workers), should invest in only one skill
- Those who become entrepreneurs may invest in one skill, but if they do so, it will be the skill in which they are weak
- But they are the only individuals who may invest in more than one skill
- Have those starting a business a more diverse skill set?
What are implications of 'jack-of-all-trades'? (3)
- Individuals with more balanced skill sets are more likely to become entrepreneurs
- Jack-of-all-trades
- The supply of entrepreneurs is smaller for production processes that require a higher number of independent skills
- Sectoral differences in entrepreneurship rates
- Individuals who become entrepreneurs should have a more balanced human capital investment strategy than those who become specialists
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