Essays on the Economics of Entrepreneurship
Faculty Advisor: Raymond Fisman
This thesis examines the role of economic markets and agents in promoting entrepreneurship, and their impact on innovation. The first chapter focuses on small business creation within the context of the United States economy, while the second chapter looks at returns to high-technology entrepreneurship internationally.
Chapter 1 examines the impact of economic downturns on entrepreneurship in the United States by illustrating the direct link between the labor market and self-employment sector. When conditions in the labor market deteriorate for certain groups of individuals they are more likely to become entrepreneurs. This chapter shows that while African-American (henceforth Black) entrepreneurship rates have hovered around one-third that of the Caucasian (henceforth White) rate across all industries since 1910, Blacks are significantly more likely than Whites to become entrepreneurs, thereby narrowing the racial entrepreneurship gap. This phenomenon is accompanied by a widening of the racial wage gap--a 1 percent increase in state level unemployment causes Black wages to fall by 5 percent while nominal White wages remain unchanged. This is not a result of a compositional change in the labor force or industry specific shocks and the estimates are robust to an IV approach. This chapter next shows that discrimination reduces the demand for Black labor, resulting in the decrease of Black wages. Black wages fall more sharply with higher unemployment in states with higher racial prejudice compared to that in states with lower racial prejudice. As Black business income does not show corresponding cyclicality these empirical facts suggest that falling wages alter the payoffs from wage employment relative to self-employment, incentivizing Blacks to start businesses. Black businesses started in recessions do not differ from their White counterparts in income generated, incorporation rates or duration of survival. Moreover, it is the higher-ability Blacks who become business owners in recessions, suggesting that these ventures are voluntary and not the result of job termination.
These findings show that Blacks do not differ from Whites in entrepreneurial ability, but face high barriers to entry into entrepreneurship and only cross these barriers when incentives change.
Chapter 2 examines the role played by economic agents and ownership structures in creating incentives for high-technology entrepreneurship. The goal of high-technology entrepreneurship is to go public through initial public offers (IPO). Going public eases access to finance and rewards entrepreneurs for innovation. This chapter examines the links between the corporate ownership structures of an economy, focusing in particular on business groups, and the degree of average underpricing associated with IPOs. This approach allows for an exploratory look at the effects of market competition, information asymmetry, power and conflicts of interest on IPO pricing. Using a cross-country analysis based on two independent data sets, the chapter shows that the amount of money left on the table for investors decreases with the degree of concentration of ownership within the economy. The greater the degree of separation between control and equity ownership, the smaller the average IPO underpricing. These findings are viewed as supporting evidence for IPO pricing theories based on share allocation, social control and power.