An agent-based model of entrepreneurship. Examining the role of alertness and transaction costs
| Date | 21 August 2017 |
| DOI | https://doi.org/10.1108/JEPP-01-2015-0003 |
| Pages | 259-270 |
| Published date | 21 August 2017 |
| Author | Graham D. Newell,Matthew J. Holian |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
An agent-based model of
entrepreneurship
Examining the role of alertness and
transaction costs
Graham D. Newell
Department of Economics, Florida State University, Tallahassee,
Florida, USA, and
Matthew J. Holian
Department of Economics, San Jose State University, San Jose, California, USA
Abstract
Purpose –The purpose of this paper is to develop an agent-based model that highlights the role of
entrepreneurship in the market process.
Design/methodology/approach –The authors explore the effect of entrepreneurial alertness and transaction
costs on two normative standards: the speed of price equilibration and the level of product diversity.
Findings –Both higher alertness and lower transaction costs lead to faster equilibration, as expected. High
alertness contributes to high product diversity, also as expected. However, and counter-intuitively,
lower transaction costs actually leads to lower levels of product diversity, as markets equilibrate before
entrepreneurs can discover many new products.
Originality/value –The analysis provides new insight into entrepreneurship theory and policy.
Keywords Entrepreneurial action, Research methods, Economic theory
Paper type Research paper
1. Introduction
Consider two books, both published in the mid-1970s –Nobel Laureate Oliver Williamson’s
(1975) Markets and Hierarchies, and Israel Kirzner’s (1973) Competition and
Entrepreneurship. Both are regarded as seminal by researchers in their fields
(organizations and entrepreneurship, respectively) and methodologically neither book can
be considered “formal”by the mathematical standards of the modern economics discipline.
However, one major difference between them is that concepts from the former have been
“formalized”in dozens if not hundreds of subsequent scholarly papers, while concepts from
the latter have been expressed mathematically far less frequently[1].
We view the paucity of formal extensions of Kirzner (1973) as an opportunity to fill a
gaping hole in the economics literature on entrepreneurship. Our approach is to develop an
agent-based computational model that highlights the role of entrepreneurial alertness and
transaction costs in the competitive process. We then explore the model’s parameter space,
deriving new theoretical insight and concrete empirical implications. By presenting a new
way for students of Kirzner to conceptualize his notions of competition and
entrepreneurship, our analysis also suggest new avenues for theorists[2].
We use our model to compare the effects of varying two parameters of the model –the
alertness of entrepreneurs and the transaction costs of doing business[3] –on two normative
standards: the speed of price equilibration and the level of product diversity (or product
variety) at equilibrium. We find that lowering transaction costs causes markets to achieve Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 2, 2017
pp. 259-270
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-01-2015-0003
Received 15 January 2015
Revised 21 May 2017
Accepted 21 May 2017
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
The second author gratefully acknowledges support from an SJSU Economics Department research
grant. The authors thank Robert Ragan, participants at APEE (Nassau) and three anonymous
reviewers for valuable comments. All errors remain of the authors.
259
An agent-based
model of
entrepreneurship
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