Abstract
This paper contributes to explain the persistence of differences in levels of entrepreneurship within and across countries. We provide an explanation based on the dynamic interplay between purposeful intergenerational transmission of preferences for entrepreneurship and public administration efficiency. Individuals vote on taxes, and the collected taxes fund the civil servants’ wages. The performance of the administration generating an efficient normative and regulatory environment, affects the success of entrepreneurship. We show that an economy can reach two different long-run equilibria: a traditional equilibrium, with a low proportion of entrepreneurs, high taxes and an inefficient administration and, an entrepreneurial equilibrium with a high proportion of entrepreneurs and, lower taxes but enough to implement an efficient administration. The equilibrium achieved depends on the tax policy followed by the different generations. If decisions are made by majority voting in a myopic way, then the initial conditions of the society become crucial. This result explains persistence: an economy evolves around similar levels of entrepreneurship unless some reforms are implemented.
Highlights
Entrepreneurship is a key aspect of economic dynamism as it determines productivity, innovation, and economic growth.1 Reynolds et al (1999)show that variations in rates of entrepreneurship may account for one third of the variation in economic growth.The persistent difference in entrepreneurship within or across countries is a well-known stylized fact
In a society with a majority of non-entrepreneurs, where this majority holds up all the profits from entrepreneurship through confiscatory taxes and receive them as civil servants’ income, the dynamics converges to a steady state equilibrium with a low proportion of entrepreneurs, which we call as a traditional equilibrium
This paper presents a theory that explains the persistence of differences between levels of entrepreneurship across countries or regions
Summary
Entrepreneurship is a key aspect of economic dynamism as it determines productivity, innovation, and economic growth (see Schumpeter 1934; Wennekers and Thurik 1999; Minniti 1999; Audretsch and Thurik 2001, for example).1 Reynolds et al (1999). Concerning regions, Fritsch and Wyrwich (2014), for example, observe that the regional differences in Germany tend to be persistent as long as periods of 80 years, despite abrupt and drastic changes in the political-economic environment. This is not an isolated case since, as these authors point out, the regional start-up rates tend to be relatively persistent over periods of one or two decades in other regions as the Netherlands (van Stel and Suddle 2008), Sweden (Andersson and Koster 2011), the UK (Mueller et al 2008), and the USA (Acs and Mueller 2008). We show that the equilibrium achieved depends completely on the tax policy followed by the different generations
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