Indirectly productive entrepreneurship

Date15 August 2016
Published date15 August 2016
AuthorAlexandre Padilla,Nicolás Cachanosky
Subject MatterStrategy,Entrepreneurship,Business climate/policy
Indirectly productive
Alexandre Padilla and Nicolás Cachanosky
Department of Economics, Metropolitan State University of Denver,
Denver, Colorado, USA
Purpose Since Baumol (1990), the economic literature has distinguished between two broad
categories of entrepreneurship: productive and unproductive. The purpose of this paper is to introduce
another subcategory: indirectly productive entrepreneurship. Sometimes, profit-seeking entrepreneurs
allocate their talents to indirectly productive activities to mitigate the new costs market participants
endure as a result of a government regulation. The resources used to mitigate these costs must be
diverted from other uses.
Design/methodology/approach This paper uses the example of cell phone storage outside New
York Citys high schoolsto illustrate an indirectly productiveentrepreneurial activity that mitigates the
inefficienciesor costs created by a regulation. These costs andthe resulting entrepreneurship wouldnot
have arisen absent the regulation.
Findings These profit opportunities do not result from market entrepreneurial errors or successes
but emerge from inefficiencies or unintended consequences produced by government regulations.
When evaluating such entrepreneurship, the question is whether such regulation is desirable from an
efficiency viewpoint because such entrepreneurship, while making such regulation less inefficient or
less costly, diverts resources from other lines of production.
Originality/value This paper identifies a new category of entrepreneurship: indirectly productive
entrepreneurship. This paper also shows that government regulation often deters productive
entrepreneurship. However, under some circumstances, regulation can indirectly encourage productive
entrepreneurship bycreating artificial profit opportunities that would not have existed otherwise.
Keywords Entrepreneurship, Public policy, Regulatory policy, Law and economics
Paper type Research paper
1. Introduction
William Baumols (1990) seminal paper showed that entrepreneurs need not allocate
their talents to productive activities to make profits. According to Baumol, how
entrepreneurs allocate their talents between productive activities such as innovation
and unproductive activities such as rent seeking depends on the institutional
environment these entrepreneurs operate in and the reward system it creates[1]. The
rules of the game matter, and when these rules reward one type of entrepreneurial
activity over others, we should see more of this type of entrepreneurship (Baumol, 1990,
p. 894)[2]. More importantly, the rules of the game matter because the resulting
allocation of entrepreneurial talent can determine whether a country will experience
economic growth. Murphy et al. (1991) have subsequently shown that countries
where the rules of the game reward unproductive entrepreneurship more than
productive entrepreneurship experience lower economic growth rates than countries
where the rules of the game reward productive entrepreneurship more than
Journal of Entrepreneurship and
Public Policy
Vol. 5 No. 2, 2016
pp. 161-175
©Emerald Group Publis hing Limited
DOI 10.1108/JEPP-03-2015-0016
Received 25 March 2015
Revised 20 January 2016
18 March 2016
18 March 2016
Accepted 18 March 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
The authors are thankful for helpful comments on the various drafts of this research paper from
George Clarke, the participants at the 52nd Annual Conference of the Public Choice Society, the
participants at the 85th Annual Meetings of the Southern Economic Association, and three
anonymous referees. The usual caveats apply.

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