What makes an entrepreneur David g blanchflower Andrew j Oswald Journal of labor economics,1998.

What makes an entrepreneur Entrepreneurship = self employment =>50%people prefer self employment Only 15% of people are self employed( in usa, Germany, uk). What factors determine the becoming of an entrepreneur? Past research reveals: Lack of capital( Evans and Leighton 1989) Possession of family assets facilitates self employment 1/12

What makes an entrepreneur Family assets arise due to: 1.Inherent ability to accumulate 2.Inheritance This paper develops a model which looks at Lack of capital and its effect on entrepreneurship– finance constraint hypothesis. Looks at psychological factors Uses survey data, data from interviews to support its propositions 2/12

What makes an entrepreneur Theoretical perspectives– two main schools Classical-creative theory ( knight 1921, schumpter 1939, kitzner 1973, casson 1982)-- most individuals are not alert to business opportunities– are ordinary opportunities cannot be assigned probabilities-- are uncertainty bearing attitude to risk is not central entrepreneur receives higher expected utility over a worker employed 3/12

What makes an entrepreneur Neo classical approach—discovery theory( khilstrom and laffont 1979, kanbur 1982, Grossman 1984, Shane 2003) All individuals are able to identify business opportunities– are unique– traits exist Opportunities can be assigned probabilities– are objective and exist Entrepreneurs receive same expected utility as workers Has unusually low risk aversion—risk bearing 4/12

What makes an entrepreneur This paper follows the classical approach Builds on eight assumptions: Beta–proportion of population with entrepreneurial vision K– amount of capital required by a project П(k) – amount of profit F(k)–distribution of capital endowments(0<k<1) Z-probability of obtaining an unsecured loan Utility =u = П +i( self employment) u=wage i=non pecuniary utility from independence 5/12

What makes an entrepreneur Assumption – no probabilistic business risk Liquidity constraint limit potential entrepreneurs Equilibrium reached when Capital constraints are binding in aggregate( profit (k) +i>w) Or wage= utility from entrepreneurship No of entrepreneurs in an economy = Beta*p (no of people with capital>k) + beta *z* no of people with capital<k This also gives the probability that a person is self employed 6/12

What makes an entrepreneur Propositions: When (profit f (k) +i=w) then Increase in beta, i, z raise equilibrium number of entrepreneurs and wage rates When (profit f (k) +I >w) then Increase in beta, z and decrease in k, raise equilibrium number of entrepreneurs and wage rates. i( utility from independence) has no effect Entrepreneurs get higher utility than workers Larger the z smaller is the utility gap 7/12

What makes an entrepreneur The study used data from national child development survey( 1981 and 1991) Focus on people who were either employed or self employed factors tested in the study: Set of personal characteristics- measures associated with persons assets Regional and industrial characteristics Access to Capital –inheritances( exogenous) Employment status Dv : probability that a person reports himself as self employed Test effects of inheritance on probability of being self employed 8/12

What makes an entrepreneur Findings An increase in the number of self employed as % of population ( 9.9%(1981) to 15%(1991) The receipt of an inheritance gift increases an individuals probability of being self employed( other factors remaining constant) Large no of people would like to be self employed Self employed people are more satisfied 9/12

What makes an entrepreneur Shortage of capital is the most frequently cited reason for not becoming self employed Most small businesses are begun with own or family money. Obtaining capital is the single biggest concern. Impact of psychological traits were not significant 10/12

What makes an entrepreneur Issues The issue of risk taking as a central trait of entrepreneur Will no of jobs in a market decrease the entrepreneurial ability of a population i – is it related to risk taking ability i- can it be got from employment Given the ability to get capital does it mean that anybody can be an entrepreneur. Given the capital what bout risk less opportunities to earn rents 11/12

What makes an entrepreneur Burns 1999 A successful entrepreneur utilizes four key principles Belief in ones ability to succeed Prioritized relevant learning Proactive approach perseverance To this add (bill Bolton 2000) Talent, temperament and technique

What makes an entrepreneur The factors can be classified as Personality factors Motivation and emotion– gives the drive and purpose and self confidence (whybrow 1999) High need for achievement( Roberts 1991) Competitiveness – main motivator Need for independence Behavioral characteristics( kuratko and hodgetts 1998)– perseverance, determination, take calculated risks, creativity, honesty and integrity, initiative, taking responsibility

What makes an entrepreneur Environmental factors( Roberts 1991) Family background – fathers career, inheritance Education – not important, start at early age Work experience– important Action factors– what entrepreneurs do Are creative and innovative Spot and exploit opportunities Find resources to exploit opportunities Manage risk, create capital are good net workers, determined