Chapter 5: Entrepreneurship Selection and Labour Demand
There is a far more close correspondence between the ability of businessmen and the size of the businesses they own than at ﬁrst sight would appear probable. (Marshall  1930, p. 312) Introduction In conditions of persistent high unemployment it is important to increase the demand for labour, and one way of doing so is to encourage the creation of new ﬁrms that hire employees. As Kaldor stated in 1934 in his seminal article ‘The equilibrium of the ﬁrm’, the determinant production factor for the size of any (mature) ﬁrm is the coordinating ability of the entrepreneur leading the ﬁrm. There can be at most one coordinator, coordinating all transactions in which the ﬁrm is involved, thereby restricting the size of the ﬁrm. The amount of all other factors of production employed is limited by the ﬁxed supply of coordinating ability by the unique entrepreneur. In another seminal contribution, Coase (1937) argued similarly: that there are ‘diminishing returns to management’ in the sense of decreasing returns to scale at a given level of entrepreneurial ability. Therefore, talented persons should be particularly induced to become an entrepreneur, for these will be most successful in creating labour demand. Knowledge of the determinants of the choice for entrepreneurship and of successful entrepreneurship may help to develop policies to this end. In this chapter I develop an integrated model that considers the individual decision to become an entrepreneur as well as the ensuing ﬁrm size. Individuals who become an entrepreneur start a new business...
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