Kugler, Entrepreneurship and Aggregate Productivity
FRB New York Staff Report No. 981
February 7, 2025
Abstract
This paper studies the relationship between entrepreneurship and aggregate productivity.
We develop a model in which entrepreneurship is a key driver of productivity growth.
In the model, entrepreneurs create new firms that are more productive than incumbents.
The entry of new firms leads to competition, which forces incumbents to become more productive.
This process leads to a virtuous cycle of productivity growth.
We test the predictions of the model using data from the United States.
We find that entrepreneurship is positively correlated with productivity growth.
We also find that the effect of entrepreneurship on productivity growth is strongest in industries with high levels of competition.
Introduction
Entrepreneurship is widely recognized as an important driver of economic growth.
However, the exact mechanisms through which entrepreneurship affects growth are not well understood.
In this paper, we develop a model that explores the relationship between entrepreneurship and aggregate productivity.
We show that in our model, entrepreneurship can lead to a virtuous cycle of productivity growth.
This cycle is driven by the entry of new firms that are more productive than incumbents.
The entry of new firms leads to competition, which forces incumbents to become more productive.
This process leads to a sustained increase in aggregate productivity.
We test the predictions of the model using data from the United States.
We find that entrepreneurship is positively correlated with productivity growth.
We also find that the effect of entrepreneurship on productivity growth is strongest in industries with high levels of competition.
Model
We consider a simple dynamic model of economic growth.
In the model, there are two types of firms: incumbents and entrants.
Incumbents are firms that have been in business for at least one period.
Entrants are firms that are new to the market.
Each period, incumbents produce output using a production function that is characterized by decreasing returns to scale.
Entrants produce output using a production function that is characterized by constant returns to scale.
The productivity of entrants is randomly distributed.
The entry of new firms leads to competition, which forces incumbents to become more productive.
This process leads to a virtuous cycle of productivity growth.
Data
We test the predictions of the model using data from the United States.
We use data on entrepreneurship from the Kauffman Foundation.
We use data on productivity from the Bureau of Labor Statistics.
We find that entrepreneurship is positively correlated with productivity growth.
We also find that the effect of entrepreneurship on productivity growth is strongest in industries with high levels of competition.
Conclusion
Our findings suggest that entrepreneurship is a key driver of productivity growth.
This is because entrepreneurship leads to the entry of new firms that are more productive than incumbents.
The entry of new firms leads to competition, which forces incumbents to become more productive.
This process leads to a virtuous cycle of productivity growth.
Our findings have important implications for policymakers.
They suggest that policies that promote entrepreneurship can lead to increased productivity growth.
This is an important goal, as productivity growth is a key driver of economic growth.
Kugler, Entrepreneurship and Aggregate Productivity
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