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Productive and harmful entrepreneurship in a knowledge economy

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Abstract

This paper develops an endogenous growth model with productive entrepreneurial activities and rent-seeking. Our purpose is to link contributions to the entrepreneurial and the endogenous growth literature. We deal with complementarity between productive entrepreneurship and harmful rent-seeking activities leading to potentially multiple equilibra in the economy. The degree of rent-seeking is endogenous in our model and is influenced by the economy’s legal and institutional framework as well as capital market imperfections. Policy which establishes the legal environment and financial institutions dealing with capital market imperfections together decides which of the potentially multiple equilibria is chosen by the economy. This institutional choice implies the solution to a trade-off between high economic growth on the one and a high level of productivity on the other hand.

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Notes

  1. The issue of complementarity has also been investigated in more recent applications of the Schumpeterian growth theory. Such contributions deal with the relationship between competition and productivity growth. Aghion et al. (2005) and Aghion and Griffith (2006) among others analyze this relationship for product market competition while e.g. Aghion et al. (2004, 2009) analyze it for competition by market entrants. In general, they arrive at a inverted U-shaped pattern relating productivity growth to the degree of competition. Again, we observe the implications of complementarity for growth. The same growth rate can be realized either by a low or a high degree of competition in the economy.

  2. We assume no depreciation of capital. A common positive rate of depreciation would not affect any result qualitatively.

  3. Hence, we assume that R&D projects are not perfectly contractible for investors. This opens an opportunistic behavior and leeway for the rent-seeker pretending to be a productive entrepreneur as described by Jensen and Meckling (1976).

  4. To simplify the analysis, we assume the fraction 1 − q in financial means provided to rent-seekers during t can already during t be recovered by making use of the legal system.

  5. Strictly mathematical interpreted, the model also implies two distinct steady states in this case. The second, however, is located outside the admissible range of values for r and g as both variables would take on complex values.

  6. In this case, Indicators for Economic Freedom across North America. Cross country studies usually employ the country indicators published by The Heritage Foundation (see e.g. Miller and Kim (2016) for details).

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Acknowledgments

We would like to thank two anonymous referees for very helpful comments on an earlier version of this paper. All remaining errors are, of course, our own.

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Authors and Affiliations

  1. Pforzheim Business School, Pforzheim University, Tiefenbronner Straße 65, 75175, Pforzheim, Germany

    Jürgen Antony

  2. Faculty of Business Studies and Economics, University of Bremen, Hochschulring 4, D-28359, Bremen, Germany

    Torben Klarl

  3. Faculty of Business and Economics, University of Augsburg, Universitaetsstraβe 16, D-86159, Augsburg, Germany

    Erik E. Lehmann

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  1. Jürgen Antony
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Correspondence to Jürgen Antony.

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Antony, J., Klarl, T. & Lehmann, E.E. Productive and harmful entrepreneurship in a knowledge economy. Small Bus Econ 49, 189–202 (2017). https://doi.org/10.1007/s11187-016-9822-x

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