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UNU-WIDER The Allocation of Entrepreneurial Talent and Destructive Entrepreneurship

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A teenager wears torn rubber boots in a muddy local market in Bac Ha, Viet Nam. As of 2005 figures, half the world population—more than 3 billion people–is estimated to live on less than USD 2.50 a day. Bac Ha, Viet Nam. UN Photo/Kibae Park.

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WP/46 The Allocation of Entrepreneurial Talent and Destructive Entrepreneurship

Entrepreneurship is generally regarded as a force of change, innovation, and development in modern economies. Entrepreneurs bring new and better products to markets, restore allocative efficiency through arbitrage and reinvest their profits. However, it has been argued that the same energy and talent can also be allocated to unproductive ends and reduce total welfare. In this paper we present a model that analyzes the allocation of a given entrepreneurial talent over destructive and productive activities. We show that in this model two stable equilibria can emerge. As Baumol (1990) hypothesized, institutions determine the payoffs to both types of entrepreneurial activity and hence drive this allocation. But we also show that the distribution of initial wealth and entrepreneurial talent play a decisive role. This analysis provides a different perspective on the importance of high quality institutions in developing countries and sheds light on the situation in conflict and post-conflict countries, where both informal and formal institutions arguably have broken down. Under such circumstances, our analysis shows that microcredits can support the transition to a productive equilibrium, because they help to overcome credit constraints without creating incentives for destructive entrepreneurship.
Publisher:
UNU-WIDER
Series:
WIDER Working Paper
Volume:
2010/46
Title:
WP/46 The Allocation of Entrepreneurial Talent and Destructive Entrepreneurship
Authors:
Mark Sanders and Utz Weitzel
Publication date:
May 2010
ISBN 13 Web:
978-92-9230-283-2
Copyright holder:
© UNU-WIDER
Copyright year:
2010
Keywords:
destructive entrepreneurship, allocation of talent, development, institutions
JEL:
D23, J24, O12, O17
Project:
Promoting Entrepreneurial Capacity
Sponsor:
UNU-WIDER gratefully acknowledges the financial contributions to the project by the Finnish Ministry for Foreign Affairs, and the financial contributions to the research programme by the governments of Denmark (Royal Ministry of Foreign Affairs), Finland (Finnish Ministry for Foreign Affairs), Sweden (Swedish International Development Cooperation Agency—Sida) and the United Kingdom (Department for International Development).
Format:
online and printed copies

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