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Entrepreneurship and business cycles: technological innovations and unemployment

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Abstract

Koellinger and Thurik (2012) find that entrepreneurship Granger-causes the cycles of the world economy, and that entrepreneurial cycles are positively affected by the national unemployment cycles. However they do not present a theoretical model to explain the empirical findings. This paper provides a theoretical explanation through an extended Ramsey model in which a differential equation describing technological innovations led by entrepreneurs, which relates entrepreneurship dynamics to unemployment and output dynamics, is considered as an additional dynamic restriction. The model generates limit cycles through the Hopf bifurcation theorem. The necessary condition for the existence of a limit cycle is that the entrepreneurial economy accumulates more capital than the Ramsey model, yielding that entrepreneurial and unemployment cycles cause business cycles.

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Notes

  1. Related empirical works are Congregado et al. (2009) and Golpe (2009)

  2. It is well-known that imperfect information in credit markets such as agency costs, adverse selection and moral hazard affect the provision of credit, making it scarce and costly (e.g., Walsh 1998). There is a branch of the literature that examines how credit restriction generates cycles, Faria and Andrade (1998), and Novak (2000) examine a model with borrowers and lenders that generates stable limit cycles.

  3. I thank one referee for remarking this.

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Acknowledgments

I would like to thank, without implicating, the Guest Editors of the Special Issue, IEMJ, Andrew Burke, José M. Millán, Juan A. Sanchis and Roy Thurik, and an anonymous referee for useful comments that helped improve the paper.

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Correspondence to João Ricardo Faria.

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Faria, J.R. Entrepreneurship and business cycles: technological innovations and unemployment. Int Entrep Manag J 11, 253–265 (2015). https://doi.org/10.1007/s11365-014-0327-2

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