The Economics Of Entrepreneurship

Foundations and Trends® in
Entrepreneurship
Vol 1, No 1 (2005) 1-54
© 2005 S.C. Parker

The Economics of Entrepreneurship: What We
Know and What We Don’t
Simon C. Parker
University of Durham, Durham, UK, s.c.parker@durham.ac.uk

Abstract
This introductory, non-technical, text offers a reflective overview of
what economics adds to our understanding of entrepreneurship. It is
designedprimarily to showcase to young entrepreneurship scholars
several interesting research questions and a toolbox of methods to
answer them. First, I will illustrate the kinds of questions that can be
posed and answered using economics. Then I will present and discuss
a selective list of “canonical” theoretical and empirical models that
form the intellectual bedrock of the Economics ofEntrepreneurship.
After that, I present and discuss some well established theoretical
contributions and empirical findings that have been generated by the
approach. I conclude by discussing aspects of “What we don’t know”
– and should. This part of the text identifies several ideal future trends
in research that build on and complement the foundations of entrepreneurship that are delineated in the mainbody of the text.

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Introduction

Entrepreneurship is a multidisciplinary field of scholarly enquiry. There
is broad agreement among those who research entrepreneurship that
no single subject discipline has a monopoly of wisdom about what
entrepreneurship is, or how entrepreneurs behave.
The present text is not intended to challenge this aspect of the
“received wisdom”. Instead, itpresents a “shop window” of what one
can achieve if one uses economics to study entrepreneurship. My aim
is to provide an overview of both the foundations of the Economics of
Entrepreneurship – the theoretical underpinnings and empirical regularities uncovered by previous research – and possible future trends in
this branch of research, by proposing fruitful topics of enquiry that
extend theboundaries of what we currently know.
A lament that is sometimes heard within business and management
schools is that the field of entrepreneurship lacks theoretical rigour –
or even, indeed, any clearly defined theories at all. However true that
claim might be of some methodological perspectives, it surely cannot
be levelled at the economics approach. Economics brings a large set of
versatileand powerful theories and methods to the study of entrepreneurship. They are usually but not always quantitative, are often based
on models of optimizing behaviour under uncertainty, and utilize

Introduction

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empirical approaches founded on the econometric analysis of large and
representative data samples. The present text aims to provide details
of the salient theoretical andempirical approaches that have been
applied to entrepreneurship. These details will be provided in a deliberately non-technical way, in order to make the text as accessible to
as wide an audience as possible. References will be given to more
detailed technical treatments of the issues which the interested reader
can pursue if they wish.
It is hoped that this text will dispel some misperceptionsabout
the economics approach; and may perhaps even convince non-economists
that the Economics of Entrepreneurship furnishes a solid theoretical
backbone to entrepreneurship research. That many non-economists
still entertain myths and misconceptions about the role and potential
of economics surely cannot be denied. Let me give just three instances.
First, contrary to what some non-economistsappear to believe, it is
simply not true that neoclassical economics ceased to progress once
competitive general equilibrium theory was completed in the 1960s and
1970s. Neither does modern economic theory assume the economy
continually moves into equilibrium; and nor does it ignore the entrepreneur, as we will see below. Second, just because modern economic
theory is rooted in optimization...