mark sanders utrecht school of economics, utrecht, netherlands max planck institute of economics,...

Mark SandersUtrecht School of Economics, Utrecht, Netherlands

Max Planck Institute of Economics, Jena, Germany

[email protected]

And

Utz WeitzelUtrecht School of Economics, Utrecht, Netherlands

Mark SandersUNU-WIDER/UNU-MERIT-workshop on Entrepreneurship, Technological Innovation, and Development

Maastricht, Netherlands October 31, 2008 slide 1 of 15

Institutions and the Allocation of Entrepreneurial Talent;

A Model of Destructive Entrepreneurship

mailto:[email protected]

Motivation

Inter-relations:

-Institutions and EntrepreneurshipBaumol (1990), Murphy et al. (1991), Acemoglu (1995)

-Entrepreneurship and Developmente.g. Naudé (2008) and all here present

-Institutions and Developmente.g. Hall and Jones (1999), Olson (1996), North (1990)

-Entrepreneurs, Institutions and Developmente.g. special issue SBEJ: Acs, Desai and Hessels (2008)

Motivation



Motivation

This paper develops a framework for analysis in which:

Institutions drive the allocation of talent…

… and the allocation of talent drives…

…development (growth) and institutions.

The interactions explain…

…the emergence of development traps…

…and helps formulate policy solutions.

Motivation



The Basic Model

Basic Structure as in Galor and Zeira (1993) and Acemoglu (1995)

The agents in the model: Maximize log linear expected utility Live and consume for 2 periodsChoose an occupation at start of period 1Experience random events during period 1Earn income, consume and save at the end of period 1Consume savings and capital income in period 2

The Model



The Model

n0 to n1=N1 n1 to n2=N2 n2 to n=N3

Wage LaborOCi

t=1Productive VenturesOCi

t=2

Destructive VenturesOCi

t=3

The Model



n0 n1 n2 n

Basic Structure is an occupational choice model:

The ModelThe Model



All agents solve:

it

it

it

OCcccρcU

it

it

it

1,,

loglog:max1

)()(:.. 11it

it

it

it

it

it

it OCYcOCYωcts

)(:.. it

it

it

it OCYωcts

Where:ωi

t is initial wealth random uniform over [ωl, ωh]

Yti(.) is income earned from occupation OCt

i

The Model

Wage LaborOCi

t=1

The Model



Expected earnings in period t and t+1:

0]1|[

]1|[

1

it

it

tit

it

OCYE

wOCYE

itt

it

it ωwρ

ρρ

ρρ

OCUE

log)1(1

log1

1log]1|[

Expected utility:

The ModelThe Model



Productive Ventures:

Income without raid:

00

10

,

0:..

:max

kωkkts

lwkklθπ

it

it

itt

αit

αit

iit

kl it

it

1)1(

1

111

1

0

αα

tαiα

αit

tit

it

it

wθααr

wkωrπ

The Model

ProductiveOCi

t=2

The Model



Expected earnings in period t and t+1 when ξ is the probability of being raided:

it

it

it

it

it

itt

it

it

krξOCYE

krξwξOCYE

111 )1)(1(]2|[

)1)(1(]2|[

i

ttit

it

t

it

it

rρwkωrρξ

wρξ

ρρ

ρρ

OCUE

10 1log))(1(log)1()1(

log)1(

1log

11

log]2|[

Expected utility:

The ModelThe Model



Destructive Ventures:

Expected assets seized per raid:

2

1

0

03 n

n

it

it

dikk

kkNξ

tn

n

it

n

n

it

it

n

n ζ

dikk

dikk

N

dikkξ

2

1

2

1

2

1

0

20

3

0

The Model

DestructiveOCi

t=3

The Model



Expected earnings in period t and t+1:

0]3|[

)(]3|[

1

it

it

tii

tit

OCYE

ζθλOCYE

itt

i

it

it

ωζθλρ

ρρ

ρρ

OCUE

)(log)1(

1log

11

log]2|[

Expected utility:

Mark Sanders

UNU-WIDER/UNU-MERIT-workshop on Entrepreneurship, Technological Innovation, and Development


iθ

itω

Lω Hω

1

0k0

θ

)( iit θω )(~ ii

t θω

)(~

0kθ

A

B

C

D

E F

G

H

The Dynamic Model

Comparative Statics:Lower k0 (Entry Barrier)

1. Allows for more people to engage in venture2. Makes 2 more attractive relative to 13. Increases average size of ventures4. Makes 3 more attractive to 1 5. Reduces probability for large ventures6. Increases probability for small ventures7. Makes 2 more attractive to 38. More 2, less 1, 3 ambiguous

The Shocks



The Dynamic Model

Comparative Statics:ωL or ωH (Initial Wealth)

1. Spread preserving increase in mean shifts box2. Adding on right what is lost on left3. No impact unless ωL>k0

4. Only ωL will cause less raiding (A)5. Reducing probability of being raided6. More 2, less 1 and 37. Only ωH will have opposite effect.

The Shocks



The Dynamic Model

Comparative Statics:Wages wt (Economic Development)

1. Workers earn wage2. Makes 1 more attractive directly3. Raiders do not get wage4. Does not affect 3 directly5. Wage reduces return on capital6. Raided ventures fall-back option is wage7. Has ambiguous effect on 2 (depend on ξ)8. More 1 or 2, less 3.

The Shocks



The Dynamic Model

Comparative Statics:Lower λ (Institutions)

1. Reduce profitability of raiding2. Makes 3 less attractive3. Reduces probability of being raided4. Makes 2 more attractive5. No effect on 16. More 2, less 1 and 3

The Shocks



Policy ImplicationsDiscussion



Overlapping generations:

Random initial wealth:

more raiding

Inheritance and endogenous wealth:

vicious and virtuous cycles

Endogenous growth and wages:

high, no and cyclical growth

Concluding Remarks

Entrepreneurship be a force for good and evil.

Institutional design is paramount in allocating that resource.

Destructive entrepreneurship feeds on productive assets.

More inequality in the distribution of such assets increases the returns to destructive entrepreneurship.

Credit constraints limit the options for talented entrepreneurs, so inequality increases the supply of destructive entrepreneurs.

Effective redistribution and access to (micro-)credit may go a long way in breaking the vicious cycle in the short run.

Concluding Remarks



mark sanders utrecht school of economics, utrecht, netherlands max planck institute of economics,...

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