Module 1 reading list

How do entrepreneurial firms differ?

For the module “Entrepreneurial firms and entry,” we explore the characteristics of entrepreneurial firms and the entrepreneur’s entry decision. Abstracts provided below with emphasis added.


The entrepreneurial firm (for this course)

Adelino, M., Ma, S. and Robinson, D. (2017) ‘Firm Age, Investment Opportunities, and Job Creation’, The Journal of Finance, 72(3), pp. 999–1038. Available at:

New firms are an important source of job creation, but the underlying economic mechanisms for why this is so are not well understood. Using an identification strategy that links shocks to local income to job creation in the nontradable sector, we ask whether job creation arises more through new firm creation or through the expansion of existing firms. We find that new firms account for the bulk of net employment creation in response to local investment opportunities. We also find significant gross job creation and destruction by existing firms, suggesting that positive local shocks accelerate churn.

Azoulay, Pierre, Benjamin F. Jones, J. Daniel Kim, and Javier Miranda. “Age and high-growth entrepreneurship.” American Economic Review: Insights 2, no. 1 (2020): 65-82. [ pdf]

Many observers, and many investors, believe that young people are especially likely to produce the most successful new firms. Integrating administrative data on firms, workers, and owners, we study start-ups systematically in the United States and find that successful entrepreneurs are middle-aged, not young. The mean age at founding for the 1-in-1,000 fastest growing new ventures is 45.0. The findings are similar when considering high-technology sectors, entrepreneurial hubs, and successful firm exits. Prior experience in the specific industry predicts much greater rates of entrepreneurial success. These findings strongly reject common hypotheses that emphasize youth as a key trait of successful entrepreneurs.

Davis, S.J. et al. (2006) ‘Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms [with Comments and Discussion]’, NBER Macroeconomics Annual, 21, pp. 107–179. Available at:

We study the variability of business growth rates in the U.S. private sector from 1976 onwards. […] Our central finding is a large secular decline in the cross sectional dispersion of firm growth rates and in the average magnitude of firm level volatility. Measured the same way as in other recent research, the employment-weighted mean volatility of firm growth rates has declined by more than 40 percent since 1982. This result stands in sharp contrast to previous findings of rising volatility for publicly traded firms in [Public firm] data. We confirm the rise in volatility among publicly traded firms using the LBD, but we show that its impact is overwhelmed by declining volatility among privately held firms. This pattern holds in every major industry group. Employment shifts toward older businesses account for 27 percent or more of the volatility decline among privately held firms. Simple cohort effects that capture higher volatility among more recently listed firms account for most of the volatility rise among publicly traded firms.

Decker, R. et al. (2014) ‘The Role of Entrepreneurship in US Job Creation and Economic Dynamism’, Journal of Economic Perspectives, 28(3), pp. 3–24. Available at:

The United States has long been viewed as having among the world’s most entrepreneurial, dynamic, and flexible economies. It is often argued that this dynamism and flexibility has enabled the US economy to adapt to changing economic circumstances and recover from recessions in a robust manner. While the evidence provides broad support for this view, the outcomes of entrepreneurship are more heterogeneous than commonly appreciated and appear to be evolving in ways that could raise concern. Evidence along a number of dimensions and a variety of sources points to a US economy that is becoming less dynamic. Of particular interest are declining business startup rates and the resulting diminished role for dynamic young businesses in the economy.

Hurst, E. and Pugsley, B.W. (2011) ‘What Do Small Businesses Do?’, Brookings Papers on Economic Activity, 2011(2), pp. 73–118. Available at: Links to an external site.. [ pdf]

We show that most small business owners are very different from the entrepreneurs that economic models and policymakers often have in mind. Using new data that sample entrepreneurs just before they start their businesses, we show that few small businesses intend to bring a new idea to market or to enter an unserved market. Instead, most intend to provide an existing service to an existing market. Further, we find that most small businesses have little desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the majority of small businesses, which are concentrated among skilled craftspeople, lawyers, real estate agents, health care providers, small shopkeepers, and restaurateurs. Lastly, we show that nonpecuniary benefits (being one’s own boss, having flexibility of hours, and the like) play a first-order role in the business formation decision. Our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated. We conclude by discussing the potential policy implications of our findings.

Kerr, W.R. and Nanda, R. (2015) ‘Financing Innovation’, Annual Review of Financial Economics, 7(1), pp. 445–462. Available at: Links to an external site.. [ pdf]

[…] Another channel through which financial markets may impact technological development, however, is by financing innovation (Hall & Lerner 2010; Brown, Martinsson & Petersen 2013). That is, though much of the academic literature in finance has focused on the implementation and commercialization of promising ideas, there has been far less focus on whether and how financial markets might actively shape the nature of R&D that is undertaken, and how this may impact technological innovation and growth through the shaping of the ideas that are developed across firms (Akcigit & Kerr 2012). This is particularly important given the changing nature of innovation investments away from government sources and toward private firms. Although the aggregate R&D expenditures as a share of GDP have fluctuated in the United States between 2% and 3% since the 1960s, the share of this investment accounted for by the private sector has doubled from around one-third in the early 1960s to two-thirds since the early 1990s

Kortum, S. and Lerner, J. (2000) ‘Assessing the Contribution of Venture Capital to Innovation’, The RAND Journal of Economics, 31(4), pp. 674–692. Available at:

We examine the influence of venture capital on patented inventions in the United States across twenty industries over three decades. We address concerns about causality in several ways, including exploiting a 1979 policy shift that spurred venture capital fundraising. We find that increases in venture capital activity in an industry are associated with significantly higher patenting rates. While the ratio of venture capital to R&D averaged less than 3% from 1983–1992, our estimates suggest that venture capital may have accounted for 8% of industrial innovations in that period.

Entry into entrepreneurship
Astebro, T. et al. (2014) ‘Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics’, Journal of Economic Perspectives, 28(3), pp. 49–70. Available at: Links to an external site.. [ pdf]

[…]there is a growing body of evidence that many entrepreneurs seem to enter and persist in entrepreneurship despite earning low risk-adjusted returns. This finding has led, in turn, to attempts to provide explanations—using both standard economic theory and behavioral economics—for why certain individuals may be attracted to such an apparently unprofitable activity. In this article, we critically evaluate what the existing research shows regarding the individual determinants of entrepreneurship. We begin by documenting a set of facts that seem to pose a challenge for interpretations of entrepreneurship based on the standard expected utility framework. The expected returns to entrepreneurship tend to be low on average but exhibit a high variance due to the fact that most startups fail completely and only a few are extremely successful. The fact that individuals enter and persist in entrepreneurship despite low risk-adjusted returns suggests that standard theories of risk and return provide an incomplete basis for entrepreneurship and may need to be complemented with richer foundations. That is, while it certainly seems plausible that entrepreneurs have different preferences about risk in a broad sense, there is also the possibility that the standard expected utility model based on objectively known distributions of risk may not capture such differences well.

Blanchflower, D.G. and Oswald, A.J. (1998) ‘What Makes an Entrepreneur?’, Journal of Labor Economics, 16(1), pp. 26–60. Available at:

This article uses various micro data sets to study entrepreneurship. Consistent with the existence of capital constraints on potential entrepreneurs, the estimates imply that the probability of self-employment depends positively upon whether the individual ever received an inheritance or gift. When directly questioned in interview surveys, potential entrepreneurs say that raising capital is their principal problem. Consistent with our theoretical model’s predictions, the selfemployed report higher levels of job and life satisfaction than employees. Childhood psychological test scores, however, are not strongly correlated with later self-employment.

Evans, D.S. and Jovanovic, B. (1989) ‘An Estimated Model of Entrepreneurial Choice under Liquidity Constraints’, Journal of Political Economy, 97(4), pp. 808–827. Available at: 

Is the capitalist function distinct from the entrepreneurial function in modern economies? Or does a person have to be wealthy before he or she can start a business? Knight and Schumpeter held different views on the answer to this question. Our empirical findings side with Knight: Liquidity constraints bind, and a would-be entrepreneur must bear most of the risk inherent in his venture. The reasoning is roughly this: The data show that wealthier people are more inclined to become entrepreneurs. In principle, this could be so because the wealthy tend to make better entrepreneurs, but the data reject this explanation. Instead, the data point to liquidity constraints: capital is essential for starting a business, and liquidity constraints tend to exclude those with insufficient funds at their disposal.

Gompers, P., Lerner, J. and Scharfstein, D. (2005) ‘Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986 to 1999’, The Journal of Finance, 60(2), pp. 577–614.

We examine two views of the creation of venture-backed start-ups, or “entrepreneurial spawning.” In one, young firms prepare employees for entrepreneurship, educating them about the process, and exposing them to relevant networks. In the other, individuals become entrepreneurs when large bureaucratic employers do not fund their ideas. Controlling for firm size, patents, and industry, the most prolific spawners are originally venture-backed companies located in Silicon Valley and Massachusetts. Undiversified firms spawn more firms. Silicon Valley, Massachusetts, and originally venture-backed firms typically spawn firms only peripherally related to their core businesses. Overall, entrepreneurial learning and networks appear important in creating venture-backed firms.

Guzman, J. (2020, March 18). The Direct Effect of Corporate Law on Entrepreneurship.

From 1946 to 1983, U.S. states modernized their corporate law by adopting the Model Business Corporation Act (MBCA), a compendium of legal best practices. Better corporate law increased entrepreneurship. After the adoption of the MBCA, the number of new local corporations increased by 26% on average, half of which was substitution from other firm types, and the rest was net-new firms. States that only partially adopted saw no benefit, and the largest increases were concentrated in regions with ex-ante lower quality law. At the individual level, people in states adopting the MBCA also report higher self-employment levels, but no higher wage employment or labor force participation. Consistent with the MBCA increasing efficiency and decreasing regulatory capture, the effect was larger for women, black, and those located outside the central city.

Hall, R.E. and Woodward, S.E. (2010) ‘The Burden of the Nondiversifiable Risk of Entrepreneurship’, American Economic Review, 100(3), pp. 1163–1194. Available at:

Entrepreneurship is risky. We study the risk facing a well-documented and important class of entrepreneurs, those backed by venture capital. Using a dynamic program, we calculate the certainty-equivalent of the difference between the cash rewards that entrepreneurs actually received over the past 20 years and the cash that entrepreneurs would have received from a riskfree salaried job. The payoff to a venture-backed entrepreneur comprises a below-market salary and a share of the equity value of the company when it goes public or is acquired. We find that the typical venture-backed entrepreneur received an average of $5.8 million in exit cash. Almost three-quarters of entrepreneurs receive nothing at exit and a few receive over a billion dollars. Because of the extreme dispersion of payoffs, an entrepreneur with a coefficient of relative risk aversion of two places a certainty equivalent value only slightly greater than zero on the distribution of outcomes she faces at the time of her company’s launch.

Hamilton, B.H. (2000) ‘Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self‐Employment’, Journal of Political Economy, 108(3), pp. 604–631. Available at:

Possible explanations for earnings differentials in self-employment and paid employment are investigated. The empirical results suggest that the nonpecuniary benefits of self-employment are substantial: Most entrepreneurs enter and persist in business despite the fact that they have both lower initial earnings and lower earnings growth than in paid employment, implying a median earnings differential of 35 percent for individuals in business for 10 years. The differential cannot be explained by the selection of low-ability employees into self-employment and is similar for three alternative measures of self-employment earnings and across industries. Furthermore, the estimated earnings differentials may understate the differences in compensation across sectors since fringe benefits are not included in the measure of employee compensation.

Hvide, H.K. and Panos, G.A. (2014) ‘Risk tolerance and entrepreneurship’, Journal of Financial Economics, 111(1), pp. 200–223. Available at:

A tradition from Knight (1921) argues that more risk tolerant individuals are more likely to become entrepreneurs, but perform worse. We test these predictions with two risk tolerance proxies: stock market participation and personal leverage. Using investment data for 400,000 individuals, we find that common stock investors are around 50 percent more likely to subsequently start up a firm. Firms started up by stock market investors have about 25 percent lower sales and 15 percent lower return on assets. The results are similar using personal leverage as risk tolerance proxy. We consider alternative explanations including unobserved wealth and behavioral effects.

Kihlstrom, R.E. and Laffont, J.-J. (1979) ‘A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion’, Journal of Political Economy, 87(4), pp. 719–748. Available at:

We construct a theory of competitive equilibrium under uncertainty using an entrepreneurial model with historical roots in the work of Knight in the 1920s.Individuals possess labor which they can supply as workers to a competitive labor marker or use as entrepreneurs in running a firm. All entrepreneurs have access to the same risky technology and receive all profits from their firms.In the equilibrium, more risk averse individuals become workers while the less risk averse become entrepreneurs.Less risk averse entrepreneurs run larger firms and economy-wide increases in risk aversion reduce the equilibrium wage. A dynamic process of firm entry and exit is stable. The equilibrium is efficient only if all entrepreneurs are risk neutral. Inefficiencies in the number of firms and in the allocation of labor to firms are traced to inefficiencies in the risk allocation caused by institutional constraints on risk trading. In a second best sense which accounts for these constraints,the equilibrium is efficient.

Lazear, E.P. (2004) ‘Balanced Skills and Entrepreneurship’, American Economic Review, 94(2), pp. 208–211. Available at:

Using data from Stanford Master of Business Administration (MBA) alumni, it is found that those who end up being entrepreneurs study a more varied curriculum when they are in the program than do those who end up working for others. That result, coupled with other findings on on-the-job training patterns reported in Lazear (2003), provides support for the following notions: first, that entrepreneurs are generalists, and second, that they make their skills more general by following a particular investment profile.

Levine, R. and Rubinstein, Y. (2017) ‘Smart and Illicit: Who Becomes an Entrepreneur and Do They Earn More?*’, The Quarterly Journal of Economics, 132(2), pp. 963–1018. Available at:

We disaggregate the self-employed into incorporated and unincorporated to distinguish between “entrepreneurs” and other business owners. We show that the incorporated self-employed and their businesses engage in activities that demand comparatively strong nonroutine cognitive abilities, while the unincorporated and their firms perform tasks demanding relatively strong manual skills. The incorporated self-employed have distinct cognitive and noncognitive traits. Besides tending to be white, male, and come from higher-income families, the incorporated—as teenagers—typically scored higher on learning aptitude tests, had greater self-esteem, and engaged in more disruptive, illicit activities. The combination of “smart” and “illicit” tendencies as youths accounts for both entry into entrepreneurship and the comparative earnings of entrepreneurs. In contrast to past research, we find that entrepreneurs earn more per hour and work more hours than their salaried and unincorporated counterparts.

Manso, G. (2016) ‘Experimentation and the Returns to Entrepreneurship’, The Review of Financial Studies, 29(9), pp. 2319–2340. Available at:

Previous studies have argued that entrepreneurs earn less and bear more risk than salaried workers with otherwise similar characteristics. In a simple model of entrepreneurship, I show that estimates of mean and variance of returns to entrepreneurship used by these previous studies are biased, as they fail to account for the option value of experimenting with new ideas. Using longitudinal data, I find patterns that are consistent with entrepreneurship as experimentation and returns to entrepreneurship that are more attractive than established by previous research.

Moskowitz, T.J. and Vissing-Jørgensen, A. (2002) ‘The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?’, American Economic Review, 92(4), pp. 745–778. Available at:

We document the return to investing in U.S. nonpublicly traded equity. Entrepreneurial investment is extremely concentrated, yet despite its poor diversification, we find that the returns to private equity are no higher than the returns to public equity. Given the large public equity premium, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a seemingly far worse risk-return trade-off. We briefly discuss how large nonpecuniary benefits, a preference for skewness, or overestimates of the probability of survival could potentially explain investment in private equity despite these findings.

Puri, M. and Robinson, D.T. (2007) ‘Optimism and economic choice’, Journal of Financial Economics, 86(1), pp. 71–99. Available at:

This paper presents some of the first large-scale survey evidence linking optimism to major economic choices. We create a novel measure of optimism using the Survey of Consumer Finance by comparing a person’s self-reported life expectancy to that implied by statistical tables. Optimists are more likely to believe that future economic conditions will improve. Self-employed respondents are more optimistic than regular wage earners. In general, more optimistic people work harder and anticipate longer age-adjusted work careers. They are more likely to remarry, conditional on divorce. In addition, they tilt their investment portfolios more toward individual stocks.