Entrepreneurship

Question 1

Why does entrepreneurship lead to economic growth?

Answer 1

• Bring new goods and services to the economy.
• Entrepreneurial talent shapes firm and national productivity growth.

Question 2

What are Adam Smith’s (1776) and Shumpeter’s view of entrepreneurship? (in brief)

Answer 2

• Adam Smith: profit-motivated entrepreneurs spur improvements in living standards.
• Entrepreneurs, the “agents of innovation” the “pivot on which everything turns”, undertake costly and risky investments, that “break away from routine” (Schumpeter) to develop new and better goods, services, and production processes.

Question 3

What is the earnings puzzle?

Answer 3

Entrepreneurs should earn more, but do not

Question 4

What is the human capital puzzle?

Answer 4

Entrepreneurship demands human capital. But entrepreneurs have ordinary skills and personality traits.

Question 5

What is human capital?

Answer 5

the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country

Question 6

Jack of all trades model - who and when?

Answer 6

Lazear, 2005

Question 7

Summarise JAT model

Answer 7

Entrepreneurs must be “jack of all trades” (JAT), this is, they must be multi-skilled. They must be sufficiently good at the wide variety of skills to ensure that the business does not fail.

The JAT that entrepreneurs should be generalists, while salaried should be specialists, implies that investments in human capital should differ between those who end up being entrepreneurs and those who end up working for others.

Question 8

What is implicit in the JAT model?

Answer 8

Implicit in this model is the notion that entrepreneurship requires mastery of a wider variety of skills than specialization.

Question 9

Notation for specialist income in JAT?

Answer 9

I_s = max[x₁; x₂] = H_s

Question 10

Notation for Entrepreneur income in JAT?

Answer 10

IE =

Question 11

What do x₁ and x₂ stand for in JAT?

Answer 11

Two skills

Question 12

What does - λ - stand for in JAT?

Answer 12

The market return to entrepreneurship

Question 13

When does an individual become an entrepreneur?

Answer 13

λ·min[x₁;x₂] = λ·H_E > max[x₁;x₂] = H_s

_{In other words, an individual becomes an entrepreneur when their income as an entrepreneur is greater than as a specialist}

Question 14

On the simple graph, with a 45º line, what does it mean if we are below/above the line?

x₁ = x axis

x₂ = y axis

Answer 14

below: x₁ > x₂

above x₂ > x₁

Question 15

What is a diagrammatic illustration of the JAT model?

Answer 15

Question 16

What happens as λ increases?

Answer 16

The market return to entrepreneurial activity rises, more individuals choose to be entrepreneurs. The boundary lines drop, increasing the area for entrepreneurs.

Question 17

What happens to income and entrepreneurial activity as x₁ and x₂ increase?

Answer 17

Income increases. As X₁ and X₂ become more highly correlated, there is more mass along the 45 line, which means more entrepreneurs.

Question 18

In professions where x1 and x2 are more complementary, will there be more or less entrepreneurs?

Answer 18

In professions in which the set of skills are highly complementary, we should see more entrepreneurs than in professions in which the skills are less complementary.

Question 19

What is the Iso-wage curve and how is it displayed in the JAT model?

Answer 19

An iso-wage curve is a line plotted on a graph, showing all of the various combinations of two inputs that result in the same amount of output.

In other words, everyone is making the same amount of money. This creates an iso-earning curvey for people in different jobs but with equal earnings.

Question 20

On which curve do people earn more?

Answer 20

People on the earning curve on the outside make the most money.

Skilled people earn more

Question 21

What is the notation for investing in a skill in order to generate a return? When will she invest?

Answer 21

Suppose investment in skills 1 and 2 can be made by spending C(∆X1; ∆X2)

Let the skill with the lower endowment be denoted as skill 2; X2.

For the wage worker, there is only incentive to invest in the skill that would be the highest at an optimum, since any investment in the other skill will generate no additional return.

She will invest as long as: ∆X1 ≥ C(∆X1).

Question 22

When plotting on an iso-earning curve, what effect does investing in a skill have?

Answer 22

It makes no difference for retraining, you will be paid the same.

Question 23

Is λ the same in different industries?

Answer 23

No, it varies across industries as there are different demands for entrepreneurs in different industries.

Question 24

What does λ equal in entrepreneurial business activity, and what does it mean?

Answer 24

λ >1

The “price” per unit of effective human capital is higher in entrepreneurial business activity

Question 25

In what circumstance does an entrepreneur earn more than a salaried worker?

Answer 25

λ >1

Question 26

What is the take home message (summary) for the JAT model?

Answer 26

Entrepreneurs are Jack of all trades, yet master of none!

Entrepreneurship is about balanced traits rather than about the levels of skills.

In professions in which the set of skills are highly complementary we should see more entrepreneurs than in professions in which the skills are less complementary.

Question 27

What can we conclude about innovation using JAT model?

Answer 27

One way of thinking about it is that innovation is more likely when someone knows about a variety of different subjects.

Question 28

Why is corporation especially valuable for large, risky endeavours?

Answer 28

Limited liability

Separate legal entity (costs & benefits)

Question 29

What can we infer about investment into human capital from the JAT model?

Answer 29

The invetsments in human capital should differ between those who end up being entrepreneurs and those who end up working for others. Entrepreneurs should be generalists, salaried should be specialists.

Question 30

Now consider an individual whose current skill vector is point XA in the graph below.

Suppose the individual will spend resources (e.g. time and money) on improving either one or both of her skills. Such expenditure, in particular, will move her skill vector from point XA to any point of her choosing along the arc, depicted in bold, that ranges from point 1 to point II.

Assume that this arc is such that any point is equally costly to reach, Which point aling the arc is most desirable?

Answer 30

Question 31

Next consider an individual whose current skill vector is point XB in the graph below.

Suppose the individual will spend resources (e.g. time and money) on improving either one or both of her skills. Such expenditure, in particular, will move her skill vector from point XB to any point of her choosing along the arc, depicted in bold, that ranges from point III to point IV.

Assume that this arc is such that any point along it is equally costly to reach. Which point along the arc is most desirable?

Answer 31

Point E on arc