The entrepreneurial rent: the value of and compensation for entrepreneurship

DOIhttps://doi.org/10.1108/JEPP-07-2016-0027
Publication Date10 April 2017
Date10 April 2017
Pages11-25
AuthorMagnus Henrekson,Mikael Stenkula
SubjectStrategy,Entrepreneurship,Business climate/policy
The entrepreneurial rent:
the value of and compensation
for entrepreneurship
Magnus Henrekson and Mikael Stenkula
Research Institute of Industrial Economics (IFN), Stockholm, Sweden
Abstract
Purpose The purpose of this paper is to show that entrepreneurship can be fruitfully analyzed by positing
that entrepreneurs are searching for rates of return exceeding the risk-adjusted market rate of return, i.e., they
try to create or discover economic rents.
Design/methodology/approach A conceptual paper trying to bridge the gap between neoclassical
economics and the entrepreneurship field by seeing entrepreneurship as the search for and creation of
(entrepreneurial) rents.
Findings In the short to medium term the search for and creation of entrepreneurial rents give rise to
supernormal profits if successful. In the longer term these rents are dissipated and accrue to society at large
as cheaper and better products. Entrepreneurial rents are crucial for bringing about the innovation and
continuous structural change required to generate economic growth.
Practical implications The search for entrepreneurial rents is crucial for economic development.
Without the possibility to earn entrepreneurial rents, no entrepreneur would be willing to exercise
entrepreneurship and exploit entrepreneurial opportunities. Successful entrepreneurship attracts imitating
firms that push back profits to normal levels and the benefits of the innovation will be diffused to consumers.
Social implications Understanding the role of entrepreneurship and its compensation is crucial for
analyses of potential policy measures. High ex post compensation for successful entrepreneurship cannot be
taxed harshly without affecting entrepreneurswillingness to supply effort.
Originality/value The entrepreneurial function and its compensation are often neglected in neoclassical
economics. This is a major shortcoming, as the presence of and search for entrepreneurial rentsare necessary
for bringing about the innovation and structural change that result in economic growth.
Keywords Innovation, Entrepreneurship, Imitation, Economic rent, Entrepreneurial rent
Paper type Research paper
1. Introduction
The profit rate and the compensation to entrepreneurs in successful firms often receive much
attention in the media. Superentrepreneurs such as Facebooks Mark Zuckerberg and Google
founders Sergey Brin and Larry Page have not only created firms that have rapidly attained
stellar value, they have also received a phenomenal rate of return on the modest financial
investment they have made in their companies. More generally, studies show that the rate of
return on the exploitation of innovations is low or sharply negative in the majority of cases, but
it is also true that the rate of return is exceptionally large for a small share of all innovations.
How can these exceptionally large rates of return which are much higher than the
risk-adjusted market rate of return be understood? The purpose of this paper is to analyze
the role of the entrepreneurial function in value creation and the nature and incentive effects
of the compensation received for exercising entrepreneurship. The value created by
exercising entrepreneurship will be denoted an entrepreneurial rent. The extent to which an
Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 1, 2017
pp. 11-25
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-07-2016-0027
Received 4 July 2016
Revised 17 December 2016
Accepted 18 December 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
JEL Classification D51, J30, L26, O31
The authors are grateful for useful comments and suggestions from Niclas Berggren, Niklas Elert,
David Audretsch, Randall Holcombe, Al Link and Joakim Wernberg. Financial support from the Jan
Wallander and Tom Hedelius Foundation and the Marianne and Marcus Wallenberg Foundation is
gratefully acknowledged.
11
Value of and
compensation
for
entrepreneurship

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