The More Business Owners, the Merrier? The Role of Tertiary Education

23 Pages Posted: 9 Nov 2014

See all articles by Mirjam van Praag

Mirjam van Praag

University of Amsterdam - Department of Economics; Copenhagen Business School; Tinbergen Institute; IZA Institute of Labor Economics

Andre J. van Stel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics

Date Written: May 16, 2012

Abstract

Policy in developed countries is often based on the assumption that higher business ownership rates induce economic value. Recent microeconomic empirical evidence may lead to a more nuanced view: Especially the top-performing business owners are responsible for the value creation of business owners. Other labor market participants would contribute more to economic value creation as an employee than as a business owner. The implied existence of an "optimal" business ownership rate would thus replace the dictum of "the more business owners, the merrier." We attempt to establish whether there is such an optimal level, i.e., a quadratic relation between the business ownership rate and economic output rather than a linear or higher-order relationship, while investigating the role of tertiary education. Two findings stand out. First, by estimating extended versions of traditional Cobb-Douglas production functions on a sample of 19 OECD countries over the period 1981-2006, we indeed find robust evidence of an optimal business ownership rate. Second, the relation between business ownership and macroeconomic productivity is steeper for countries with higher participation rates in tertiary education. Thus, the optimal business ownership rate tends to decrease with tertiary education levels. This is consistent with microeconomic theory and evidence showing that business owners with higher levels of human capital run larger firms.

Keywords: Business ownership, Human capital, (Returns to) education, Cross-country comparison, Production function

JEL Classification: E23, J24, L26, O40, O57

Suggested Citation

van Praag, Mirjam and van Stel, Andre J., The More Business Owners, the Merrier? The Role of Tertiary Education (May 16, 2012). Small Business Economics, Vol. 41, No. 2, 2013. Available at SSRN: https://ssrn.com/abstract=2515053

Mirjam Van Praag (Contact Author)

University of Amsterdam - Department of Economics ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4096 (Phone)
+31 20 525 4182 (Fax)

Copenhagen Business School ( email )

Kilevej 14A
Frederiksberg, 2000
Denmark

Tinbergen Institute

Gustav Mahlerlaan
Amsterdam
Netherlands

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Andre J. Van Stel

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics ( email )

Kahlaische Strasse 10
D-07745 Jena, 07745
Germany

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