Productive versus unproductive entrepreneurship. Industry formation and state economic growth
| Pages | 145-160 |
| Date | 15 August 2016 |
| Published date | 15 August 2016 |
| DOI | https://doi.org/10.1108/JEPP-12-2015-0035 |
| Author | Stephan F. Gohmann,Bradley K. Hobbs,Myra J. McCrickard |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Productive versus unproductive
entrepreneurship
Industry formation and state economic growth
Stephan F. Gohmann
Department of Economics, University of Louisville, Louisville, Kentucky, USA
Bradley K. Hobbs
Department of Economics and Finance, Florida Gulf Coast University,
Fort Myers, Florida, USA, and
Myra J. McCrickard
Department of Economics and Finance,
Bellarmine University, Louisville, Kentucky, USA
Abstract
Purpose –The purpose of this paper is to examine the correlation between the degree of economic
freedom in state institutions and industry employment and then determine how these correlations
relate to economic growth.
Design/methodology/approach –The authors find the correlation between employment and
economic freedom for each NAICS industry code and then calculate total employment in industries
with positive correlation and negative correlations. The authors use these values in a GDP equation.
Findings –The authors find that employment growth in industries characterized by a negative
correlation is associated with a decline in state per capita GDP. When the correlations between
employment and economic freedom are positive, state per capita GDP tends to grow, even after
accounting for overall economic freedom in the state.
Research limitations/implications –Eliminating or reducing opportunities for firms to use
government institutions to gain special treatment will lead to greater economic growth.
Originality/value –This paper allows the data to determine which industries potentially engage in
productive and unproductive entrepreneurship.
Keywords Entrepreneurs, Economic growth, Rent seeking
Paper type Research paper
1. Introduction
The type of entrepreneurship that government engenders depends upon the incentives
established and embodied in the institutional frameworks that governments form.
Institutions affect not only the initial development and path of entrepreneurial
ventures, they also influence the form of entrepreneurship we are likely to observe.
This paper focusses on the effects of these institutional frameworks on the type of
entrepreneurship that businesses engage in and also on the interplay between
entrepreneurial talent levels, occupational choice, and firm size.
This paper is an investigation founded upon the distinction in the literature between
productive and unproductive entrepreneurship (Lucas, 1978; Murphy et al., 1991; Baumol,
1990). The general story is that the type of entrepreneurship pursued can be either
value-creating (“productive entrepreneurship”) or rent seeking (“unproductive
entrepreneurship”) and that this decision is determined by the institutional frameworks
formed by government and faced by entrepreneurs. Profits can flow to the firm or
industry through either form of entrepreneurship because institutional frameworks help
Journal of Entrepreneurship and
Public Policy
Vol. 5 No. 2, 2016
pp. 145-160
©Emerald Group Publis hing Limited
2045-2101
DOI 10.1108/JEPP-12-2015-0035
Received 8 December 2015
Revised4March2016
7 March 2016
Accepted 7 March 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
145
Industry
formation and
state economic
growth
to determine which form –productive or unproductive –provides the highest rates of
profit. In the end, the institutional frameworks give signal and purpose to their decision to
favor either the creation of new wealth or the redistribution of existing wealth.
2. Literature review
The literature on occupational choice and size of firms suggests several implications
for models that examine entrepreneurship and rent seeking. First, according to Lucas’
(1978) entrepreneurial talent model the most able of entrepreneurs will guide the
largest firms. In addition, from an empirical perspective, employment will grow more
rapidly in companies with the most able entrepreneurs. This is true for companies
engaged in either productive entrepreneurship (i.e. traditional value-enhancing
activities) or unproductive entrepreneurship (i.e. rent seeking). If employment growth
occurs in industries marked by unproductive entrepreneurship then economic growth
will be inhibited relative to when employment growth is in industries engaged in
productive entrepreneurship. Furthermore, Lucas (1978) addresses effects on the size
and distribution of firms in an economy. The size of firms that develop in an
economy is a function of managerial talent. In simple form, the labor market is
divided into managers and workers. Individuals with the greatest managerial ability
become managers and the remainder of the population becomes wage earners.
Among managers, the most able managers manage the largest firms, have more
employees, and earn greater profits. High-talent managers will earn more but the
earnings of the marginal manager equal those of the most able wage earner.
Additionally, more talented individuals will gain more by being marginally better
than their competitors (Rosen, 1981).
Second, individuals will choose the occupations in which their talents are most
valued by others within a labor market setting. Murphy et al. (1991) (referred to
through the rest of the paper as MSV), use an occupational choice model to show that
when the cost of rent seeking is lower than the cost of pursuing entrepreneurship, the
most able individuals will pursue rent seeking and will have larger firms. The MSV
model retains a significant component of the Lucas model, but incorporates rent
seeking as an occupational choice where more able individuals operate larger firms.
Figure 1 outlines occupational choice in the MSV model. The inclusion of rent seeking
has several implications[1]. First, individuals will evaluate the economic and
institutional environment in which they wish to start their firm. Second, given the
economic inputs available, if the institutional environment favors market-oriented
behavior, then more able individuals will pursue value-creating entrepreneurship.
Third, if the institutional environment favors government-oriented institutions, more
able individuals will choose to rent seek. Choosing the latter will lead to lower
economic growth for an economy.
Third, institutions affect the choice between unproductive entrepreneurship and
productive entrepreneurship (Baumol, 1990). Baumol classifies entrepreneurship as
being productive, unproductive, or destructive. He argues that some institutional
environments are influential on the entrepreneurial choice and documents a num ber of
societies which went down the path of rent seeking as a predominant form of rule
organization vis-à-vis value creation. Generally, unproductive entrepreneurship occurs
as a result of rent-seeking behaviors, will encourage additional rent seeking, and will
lead to lower economic growth. Rent seeking is a zero-sum game only when no
transactions costs exist. If any resources are expended on procuring, monitoring , or
maintain these rents then rent seeking becomes a negative sum game (Tullock , 1980)
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