Economic reasons for engaging in entrepreneurship and supporting small businesses
5 important questions on Economic reasons for engaging in entrepreneurship and supporting small businesses
CQ 1: Why do some persons start a business and others not? (2)
- Labour market approach, with focus on individual, choices (outcomes), and relative utility
- Simple static model: there is more than money (procedural utility)
CQ 2: Is there a relation between an entrepreneur's skill set and business size? (3)
- Lucas model: Entrepreneurial ability as determinant of optimal level of entrepreneurship in a country
- Lazear model: Link between balanced skill set and entrepreneurship
- Risk aversion may lead to entrepreneurship through investing in balanced skills (case 4)
CQ 3: Should governments support small businesses? (2)
- Mice, gazelles, elephants: Supporting mice is not obvious, main focus currently on gazelles
- There are many myths about gazelles (but gazelles do exist)
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In the light of the Lazear model, can you think of a mechanism through which risk aversion may lead to entrepreneurship? (Background: "Hsieh, Parker & Van Praag (2017) Risk, balanced skills and entrepreneurship')
- Risk averse people typically abstain from entrepreneurship (Kihlstrom & Laffont)
- However: Risk averse people spread risk in early life by investing in multiple skills
- Lazear: 'Individuals who become entrepreneurs should have a more balanced human capital investment strategy on average than those who become specialists'
- Hence, though investments in a balanced skill set, risk averse individuals may enter entrepreneurship in later life (Hsieh, Parker & Van Praag)
What are the findings of 'Risk aversion and balanced skills: The Research'? (2)
- Positive association between risk aversion and balanced skills
- Robust after inclusion control variables
- (Dependent variable: Self-employment)
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