Entrepreneurship -- the launching and management of new businesses -- is of fundamental theoretical and empirical importance to the discipline of economics. Despite its centrality, however, it is almost always given cursory treatment in microeconomics courses and textbooks. One reason is the absence of models that analyze entrepreneurship within the framework of the microeconomic theory that is conventionally taught. The main purpose of the present paper is to begin to fill this gap in our pedagogy by presenting a simple diagrammatic model of the entrepreneur “plunge” decision that is appropriate for use in undergraduate theoretical and applied microeconomics courses.
Method
I begin by setting the stage -- making the case for teaching entrepreneurship in upper-level undergraduate microeconomics courses, documenting the minimal coverage of the subject in intermediate microeconomic theory textbooks, and defining “entrepreneur” for the purposes of the paper. I next describe the model -- starting with a brief intellectual history, continuing with a semi-formal development, and ending with an overview of how I present it in class. The paper concludes with a few final comments. Some model-based problems that I assign in my intermediate microeconomics courses are presented in an appendix.
Results
The principal result of the paper is a student-friendly model of the decision to become (or not become) an entrepreneur based on standard microeconomic concepts. The model derives ultimately from Tibor Scitovsky’s classic analysis of the owner-managed firm (1943) but with additional features from later authors. An employee considers starting her own business. Her utility level is a function of income, leisure, and a set of job characteristics that capture the qualitative aspects of the work experience beyond compensation and hours, such as the amount of autonomy. The values of these measures for both her current job and the entrepreneurial option are known. Given these assumptions, the model determines her income, leisure, and utility level as an entrepreneur -- the last part depending in part on her evaluation of the qualitative dimensions of the entrepreneurial experience. The individual then chooses to be an entrepreneur if the utility obtained from running her own business is greater than that received from her current job (taking into account its qualitative dimensions).
Discussion
After presenting the model in class, I use it as a point of departure for discussing a variety of topics in the economics of entrepreneurship. These typically include:
* Alternative entrepreneur classifications: replicative vs. innovative (Baumol, 2010), equilibrating vs. disequilibrating (Rosen, 1997), etc.
* The empirical importance of non-pecuniary motivations in the decision to become an entrepreneur, and
* The “paradox of entrepreneurship” (entrepreneurs are happier than employees even though they earn less money and work longer hours).