Entrepreneurship and Uncertainty: Innovation and Competition among the Many

Abstract

Schumpeter stressed innovation and Knight uncertainty as preconditions for entrepreneurship and productivity growth. Schumpeter emphasized entry in his early work but came to consider incumbent innovation the dominant mode in his later work. Modern growth theory emphasizes dissemination of knowledge to explain progress in the steady state. The paper analyzes the effects of entry, market structures and uncertainty on the incidence and diffusion of innovation. The insertion of Knightian uncertainty in Schumpeter's model can explain why innovators are numerous and arrive unexpectedly. Uncertainty spurs diffusion and improves the utilization of human capital. Combining the ideas of Schumpeter and Knight also elucidates several stylized facts of entrepreneurship, such as small entry size; low chances of survival and high growth rates.