The private financial gains to entrepreneurship: Is it a good use of public money to encourage individuals to become entrepreneurs?

For example, Shane (2009) cites Gorge W. Bush who in 2006 stated “Small businesses are vital for our workers…. That’s why it makes sense to have the small business at the cornerstone of a pro-growth economic policy…. Small Business Administration is working hard to make it easier for people to start up companies. We understand that sometimes people have got a good idea, but they’re not sure how to get something started…. And so we’ve doubled the number of small business loans out of the SBA since I came to office.”

The described market failure is of a general kind and encompasses a range of more precisely defined market failures, such as credit constraints. Under credit constraints, the returns to entrepreneurship are lower than optimal because the project is not funded at marginal cost, as it would be without market failures. If credit constraints are large enough, the returns to the effort drop below the opportunity cost and the prospective entrepreneur stays employed, even though the project is net present value positive for the economy (see e.g. Evans and Jovanovic 1989). In a similar manner, Edwin Mansfield was one of the first to estimate both the private and public rate of return to conducting R&D by profit-making firms. He showed a wide difference between the two rates of return, with the private return being far lower. Summarizing results, Mansfield (1991) wrote: “in each of these studies, the social rate of return from an innovation was, on the average, at least double the private rate of return to the innovator from its investment in the innovation”. This body of work has been heavily cited as a major argument for why governments should subsidized R&D by profit-making firms.

In a provocative paper, Shane (2009) comes to the conclusion that “Encouraging more and more people to start businesses won’t enhance economic growth or create a lot of jobs because start-ups, in general, aren’t the source of our economic vitality or job creation.” He argues and provides convincing evidence that “Policy makers often think that creating more start-up companies will transform depressed economic regions, generate innovation, and create jobs. This belief is flawed because the typical start-up is not innovative, creates few jobs, and generates little wealth.” Another paper making the same argument is by Hurst and Pugsley (2011). While this paper does not disagree with the analysis of Shane (2008, 2009) and Hurst and Pugsley (2011), this paper builds on the “market-failure” doctrine for motivating public policy.

For a detailed review of the evidence reported in this section, see Åstebro (2012) and Åstebro and Chen (2014).

Alternative answers are that people enjoy the non-monetary benefits of entrepreneurship, such as the degree of autonomy, independence, flexibility, or ability to work on a number of different tasks. For a review of these alternative explanations, see Åstebro et al. (2014).

For example, Shane (2009, p. 30) reports that every year only about 7 % of new companies in the USA are started in industries considered “high tech.” Similarly, Hurst and Pugsley (2011) report from two different surveys that only between 2.7 and 4.9 % of new or small businesses acquire any type of patent.

For example, Scherer and Harhoff (2000) report that of all Harvard patents, which are already an extremely select group of patents, the top 10 percent provided 84 % of the total economic value of those patents.