Oxford Internet Institute; Harvard University - Harvard Kennedy School (HKS)
KSG Working Paper No. RWP07-023
Innovative entrepreneurship is seen as a central driver of economic growth. Lawmakers around the world have attempted to use law to foster such entrepreneurship. Yet, frequently law is described as the enemy of entrepreneurs. This paper argues that this is a fundamental misconception. In part I of the paper I suggest three distinct roles - leveling, protecting, and enabling - that law can play to foster entrepreneurship. Part II develops a comprehensive framework for crafting laws that facilitate entrepreneurship based on risk theory. Utilizing expected utility theory I propose that lawmakers may want to focus less on direct financial losses or gains for entrepreneurs (like subsidies or tax breaks), and more on the predictability of legal processes. Behavioral economics suggests that lawmakers need to be careful how they frame laws intended to facilitate entrepreneurship. A risk-based framework for entrepreneurial law rests on an important assumption: on the linearity of the innovation process and the central importance of the individual entrepreneur. Part III of the paper shows how a more nuanced understanding of innovation has fundamental repercussions for the role we assign law. I suggest (and demonstrate through cases) that the most appropriate role for law may not be reactive (however well thought out), but entrepreneurial - actively creating market tensions that entrepreneurs then successfully exploit. I conclude that lawmakers have a much more central and important role in shaping entrepreneurial activity in our nation than has traditionally been ascribed to them.
Number of Pages in PDF File: 32
Keywords: entrepreneurship, law, innovation, public policy, risk, science and technology studies, behavioral economics
JEL Classification: O31, O38, O34, O33
Date posted: May 8, 2007