Entrepreneurial innovation and economic growth

A fast growing empirical literature identifies an important role of entrepreneurs for productivity growth. This paper develops a simple overlapping-generations framework with endogenous occupational choice and productivity-enhancing entrepreneurial innovation. It shows that introducing these basic features into R&D-based growth theory has important implications. First, an equilibrium with price-taking firms can be supported despite a constant returns to scale production technology, once entrepreneurial human capital is accounted for. Second, in the proposed model, a larger size of the workforce capable to conduct R&D neither affects the long-run rate of economic growth (“strong scale effect”) nor per capita income or welfare (“weak scale effect”). Economic growth is sustained in the long-run and may be policy-dependent.