Does Entrepreneurship Promote Growth? A Model of Occupational Choice with Risk-Attitude Heterogeneous Agents

Abstract

This paper studies whether promoting entrepreneurship is always growth-enhancing under a dynamic general-equilibrium framework in which agents differ in their risk attitude. Less risk averse agents become entrepreneurs who contribute to economic growth through a product variety effect. Workers, who are net savers, also contribute to growth through a loanable fund supply effect. The working of these two effects results in a non-monotone entrepreneurship-economic growth relationship. Due to risk aversion and the presence of an intergenerational externality, both of the two effects are under-valued by individuals. As a result, there can be too less or too much entrepreneurship in the decentralized equilibrium. Although having some of the entrepreneurial risk insured away can be growth-enhancing, it is never optimal to provide full insurance. How changes in the distribution of risk attitude and the degree of uncertainty may affect occupational choice and balanced growth are also examined.

Keywords: Occupational Choice, Entrepreneurial Risk, Balanced Growth

JEL Classification: D90, O4