12/8/2014: Experience, Earnings & differences Between Economies

In the previous post, I summarised recent research paper on entrepreneurial learning-by-doing (http://trueeconomics.blogspot.it/2014/08/1082014-serial-entrepreneurship.html). Here are some other recent papers on the topic of entrepreneurship and human capital.

First paper is by Lagakos, David and Moll, Benjamin and Porzio, Tommaso and Qian, Nancy, titled "Experience Matters: Human Capital and Development Accounting" (December 2012, CEPR Discussion Paper No. DP9253: http://ssrn.com/abstract=2210223). The authors use micro-level data from 36 countries to look at evolution (over time) of ratios of experience-to-earnings. They find that the ratios profiles are flatter in poor countries than in advanced economies. In other words, experience-linked returns are flatter in poorer economies, or put differently: for each year gained in experience, poor country workers gain less in earnings than their rich countries counterparts.

The paper does not aim to explain the reasons for this empirical regularity, though the authors do say that "…composition differences [of workers (e.g., by schooling attainment or sector of work)] explain very little of the cross-country differences in the steepness of experience-earnings profiles. …Amongst other possible explanations, we note that our main finding that experience-earnings profiles are flatter in poorer countries is consistent with a class of theories in which TFP and experience human capital accumulation are complementary (i.e., low TFP in poor countries depresses the incentives to accumulate human capital)."

What the authors do, however, is look at the role that differences in experience-earnings profiles found between countries can have on levels of development. "When the country-specific returns to experience are interpreted in such a development accounting framework -- and are therefore accounted for as part of human capital -- we find that human and physical capital differences can account for almost two thirds of the variation in cross-country income differences, as compared to less than half in previous studies."

Specifically, on human capital side, "We calculate the part of human capital due to experience and show that this is positively correlated with income, and furthermore that its cross-country dispersion is similar in magnitude to the dispersion of human capital due to schooling."

In the forthcoming article in the Village magazine, I challenge Thomas Piketty's interpretation of income and wealth inequality data, in part, on the grounds of his failure to reflect the role of human capital in generating financial returns. It looks like the above study provides some more support for my arguments.

10/8/2014: Serial Entrepreneurship: Learning by Doing?

We often hear references to the U.S. entrepreneurial climate whereby one's failure at the first venture is commonly rewarded with an encouragement to start again. One of the alleged reasons for this climate emergence, the popular belief asserts, is that an entrepreneur learns from failure or success of the first venture to deploy this knowledge to achieve a greater success in the second entrepreneurial endeavour.

"Serial Entrepreneurship: Learning by Doing?" (NBER Working Paper No. w20312) by FRANCINE LAFONTAINE, and KATHRYN L. SHAW, looks are whether "Among typical entrepreneurs, is the serial entrepreneur more likely to succeed?" and "If so, why?"

The paper uses "a comprehensive and unique data set on all establishments started at any time between 1990 and 2011 to sell taxable goods and services in the state of Texas. An entrepreneur is defined as the owner of a new business. A serial entrepreneur is one who opens repeat businesses. The success of the business is measured by the duration over which the business is in operation."

And the conclusions are:

• "The data show that serial entrepreneurship is relatively uncommon in retail trade. Of the almost 2.3 million retail businesses of small owners of new businesses in our data, only 25 percent are started by owners who have started at least one business before, and only 8 percent are started by an owner who is still operating at least one other business started earlier."
• "However, once one becomes an entrepreneur for a second time, the probability of becoming one a third time, or fourth time, and so on, keeps rising."
• "Moreover, we find that an owner's prior experience at starting a business increases the longevity of the next business opened, and that controlling for person fixed effects, prior experience still matters."
• "Finally, experience at starting retail businesses in other sectors (e.g. a clothing store versus a repair shop) is beneficial as well, though not as much as same sector experience, and not in the restaurant sector."

The authors conclude that "prior experience imparts general skills that are useful in running the new business."