1.3: The Value of Entrepreneurship

Question 1

Who earns more? Entrepreneurs or employees, and how does it compare across earning percentiles?

Answer 1

Individuals’ Utility Levels: on average, entrepreneurs earn less than employees. At the top 25% earners, entrepreneurs earn much more than employees. In the low 50%, entrepreneurs earn much less.

Question 2

What are the 4 measures to quantify the economic value of entrepreneurship in the Van Praag and Versloot (2007) meta-study?

Answer 2

1. Employment
2. Innovation
3. Productivity and Growth
4. Individuals’ Utility Levels

Question 3

What is the definition of entrepreneurial firms?

Answer 3

1) They employ fewer than 100 employees
2) They are less than 7 years old
3) They are new entrants into the market
All other firms are the counterparts, or members of the control group

Question 4

What is the definition of an entrepreneur in Van Praag & Versloot (2007)?

Answer 4

Self-employed or owner-manager of incorporated business, with all others being employees or members of the control group.

Question 5

What are the variables of the measurement “Employment” in Van Praag & Versloot (2007)?

Answer 5

1. 1. Employment Generation (number of jobs created)
2. 2. Employment Dynamics (firm growth in number of jobs)
3. 3. Employee Remuneration and Satisfaction (wage levels, benefits)

Question 6

What are the variables of the measurement “Innovation” in Van Praag & Versloot (2007)?

Answer 6

2. 1. Production of Innovation (patents, new products)
3. 2. Commercialization of Innovation
4. 3. Adoption

Question 7

What are the variables of the measurement “Productivity and Growth” in Van Praag & Versloot (2007)?

Answer 7

3. 1. Growth of Value added
4. 2. Labour Productivity
5. 3. Total Factor Productivity

Question 8

What are the variables of the measurement “Individual Utility” in Van Praag & Versloot (2007)?

Answer 8

4. 1. Returns to Self-Employment
5. 2. Volatility (Job Risk)
6. 3. Job Satisfaction

Question 9

What is a U-shaped relationship?

Answer 9

The U-shaped relationship/curve usually refers to the nonlinear relationship between two variables, in particular, a dependent and an independent variable. There is a minimum or a maximum.

Question 10

What are the conclusions of Variables 1.1 and 1.2 in Van Praag & Versloot (2007): Employment Generation and Dynamics?

Answer 10

1. Firm growth rates are decreasing in firm size among firms of the same age.
2. Firm growth rates are decreasing in firm age among firms of the same size.
3. Entrepreneurial firms have a higher contribution to employment generation.
4. In the long run, entrepreneurial firms generate externalities leading to more employment, also in older, larger and incumbent firms (increase the overall labour demand for the entire economy).
5. Although entrepreneurial firms create more jobs, the jobs they create are less secure due to higher volatility and higher probabilities of firm dissolution.

Question 11

What are the conclusions of Variable 1.3 in Van Praag & Versloot (2007): Employee Remuneration and Satisfaction?

Answer 11

1. Entrepreneurs hire people with lower levels of human capital.
2. Entrepreneurial firms pay lower wages, offer less employee benefits and less productivity related pay.
3. However, their employees seem to be more satisfied.

Question 12

What are the conclusions of Variable 2.1 in Van Praag & Versloot (2007): Production of Innovations?

Answer 12

1. Entrepreneurial firms produce fewer innovations and do not invest more in innovations than their counterparts.
2. But the quality of their innovations may be higher and their production more efficient (more innovations per employee).

Question 13

How can the quantity and quality of the production of innovations be measured?

Answer 13

• Measurement of quantity of innovations:
1. R&D expenditures
2. Number of produced patents
3. Number of new products or technologies introduced
• Measurement of quality of innovations:
1. Patent citation rates
2. Subjective importance of new products / technologies

Question 14

What are the conclusions with regards to the probability and share of sales of Variable 2.2 in Van Praag & Versloot (2007): Commercialization of Innovations?

Answer 14

1. The probability of sales from innovations in general is lower for entrepreneurs.
2. The share of sales from innovations is higher for entrepreneurs.
3. The probability of generating sales from specific innovations is higher for entrepreneurs.
4. But the economic benefit from these sales is diminished by the value destruction of entrepreneurs.
   * Entrepreneurs bring the patent into the business, then it doesn’t count as “producing” it within the business.

Question 15

How can the Commercialization of Innovations be measured?

Answer 15

• Measurement of commercialization:

1. Probability of sales from innovations in general
2. Probability of sales from a specific innovation

Question 16

What are the conclusions with regards to speed, volume, and cost of Variable 2.3 in Van Praag & Versloot (2007): Adoption?

Answer 16

1. Smaller firms adopt innovations earlier.
2. Smaller firms buy smaller volumes.
3. Larger firms adopt higher-cost innovations.

Question 17

What are the general conclusions with regards to quality and overall production of Variable 2 in Van Praag & Versloot (2007): Innovations?

Answer 17

1. Entrepreneurs produce fewer patents and fewer new products and technologies.
2. However, entrepreneurs are more efficient in the production of innovations and the quality of their innovations is higher.
3. Overall, entrepreneurs and their counterparts contribute equally to the innovativeness of society.

Question 18

What are the general conclusions with regards to growth and total factor productivity of Variable 3 in Van Praag & Versloot (2007): Productivity?

Answer 18

1. Entrepreneurs’ production value added grows relatively fast in comparison to non-entrepreneurs.
2. Entrepreneurs’ labour productivity levels are not higher than those of their counterparts.
3. But the growth (dynamic) of labour productivity is higher for entrepreneurs.
4. Similarly, total factor productivity levels are not higher for entrepreneurs.
5. But total factor productivity growth is higher for entrepreneurs.

Question 19

What are the conclusions with regards to income of Variable 4.1 in Van Praag & Versloot (2007): Returns to Self-Employment?

Answer 19

1. Entrepreneurs seem to earn lower median incomes than employees.
2. For the upper part of the income distribution, entrepreneurs earn more than employees.

Question 20

What are the conclusions with regards to income of Variable 4.2 in Van Praag & Versloot (2007): Returns’ Volatility?

Answer 20

1. The distribution of entrepreneurs’ incomes is much less equal, i.e. has a higher variance than the income distribution of wage employees.
2. Entrepreneurs’ incomes can be negative, while wage employees only make positive incomes.
3. Entrepreneurs’ income uncertainty is higher.

Question 21

What are the general conclusions with regards to income and satisfaction of Variable 4 in Van Praag & Versloot (2007): Utility?

Answer 21

1. Entrepreneurs have lower median incomes.
2. Entrepreneurs have more volatile, riskier incomes.
3. Nevertheless, entrepreneurs are more satisfied than employees.

Question 22

What factor leads to entrepreneurial confidence in Tversky and Kahneman (1974)?

Answer 22

Humans tend to overestimate the probability of events they can easily remember; other probabilities are rather underestimated:
– Entrepreneurs such as Bill Gates are well-known; therefore, their success can be easily recalled from memory.
– Profits of small, less successful enterprises are not very “well-known”.

Question 23

Why don’t entrepreneurs quit the business if profits turn out to be much lower than expected?

Answer 23

– 1st reason: exit barriers due to specific investments; specific investments that are sunk costs tie people to self-employment (case of a fish trap); e.g. specialized machine or firm specific software
– 2nd reason: the experience of giving up independency: switching to wage employment could imply incurrence of „psychological cost“
– 3rd reason: „hoping for sunshine“; next year will be much better!
– 4th reason: liabilities against creditors and possible loss of private property; „working for the bank loan“.

Question 24

What are the general conclusions of Van Praag and Versloot (2007) in regards to employment creation, productivity, innovation, and utility?

Answer 24

• Entrepreneurs have a very important and specific function in the economy. They engender relatively high levels of employment creation, productivity growth. Entrepreneurs produce and commercialize high quality innovations. They are more satisfied than employees.
• However, non-entrepreneurs account for larger scale in terms of labour demand, GDP, a less volatile and more secure labour market, higher paid jobs, and a greater number of innovations.

Question 25

What is the critique on Van Praag and Versloot’s (2007) study?

Answer 25

It’s not a real meta study because of few sources. But it’s because there was not much quality data. The possible causes and interaction effects are not accounted for.

Question 26

Why are Entrepreneurs willing to earn less than employees?

Answer 26

The utility entrepreneurs derive is non-monetary, procedural utility (intrinsic reward).

Question 27

What was the conclusion of 4. Wennekers et al. (2005)?

Answer 27

Panel of 36 more developed countries countries: there is a positive correlation between entrepreneurial activity and a country’s innovative capacity and technological change.