Entrepreneurial effort and economic growth
Entrepreneurs allocate resources among different activities that generates a profit; in particular, in this paper entrepreneurs consider at each instant of time both innovation and rent-seeking as alternative sources of profit. The consequences in terms of economic growth are obviously quite different: the higher the amount of innovations in the economy the higher the rate of economic growth and vice versa. What are the determinants of these different entrepreneurial behavior? Is there anything in the nature of entrepreneurs that essentially distinguishes between innovators and rent seekers? A main claim of this paper is that differences among entrepreneurs are not essential but of degree: all of them are in fact profit-seekers and the only difference is to be found in their attitude towards innovation as a source of profit. In this sense entrepreneurial effort is defined and modelled for each entrepreneur according to its propensity to innovate and the corresponding Entrepreneurial Problem (EP) is posed and solved both analytically and via simulation in terms of profit maximization. The individual decisions measured in units of innovation are then aggregated to calculate the innovation quantity for a given population based on the distribution of heterogeneous entrepreneurs. The entrepreneurship rate and the implications for economic growth are also modelled. Consequently, policy makers should focus on reducing the entry barriers and the costs of production in order to stimulate the entrepreneurial activity and maximize the innovation quantity.