Entrepreneurial Efficiency: Theory

Abstract

This paper models firms' entrepreneurial ability according to their ability to predict changes in productivity (i.e., their prediction ability), and derives an aggregate production function as a result of entrepreneurship. An increase in firms' prediction ability improves allocative efficiency in a competitive economy, but can reduce it when opportunities are distorted. It is shown that prediction ability can aggravate distortions in the presence of political risk. Because efficiency affects the total factor productivity (TFP) of an economy, the model can explain how entrepreneurship influences TFP.entrepreneurship, prediction ability, total factor productivity, allocative efficiency, aggregate production function.