A i i E t hiA primer in EntrepreneurshipChapter 1.5: Entrepreneurship theory
Prof. Dr. Ulrich Kaiser
Department of Business AdministrationDepartment of Business Administration
University of Zurich
Fall Semester 2013
Chapter 1.5: Entrepreneurship theory
Table of Contents
I. Lazear’s (2005) Jack‐of‐all‐trades theory
II F b l’ (2004) O i thII. Fabel’s (2004) O‐ring theory
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
2
Chapter 1.5: Entrepreneurship theory html
I. Lazear’s (2005) Jack‐of‐all‐trades theory
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University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
3
Chapter 1.5: Entrepreneurship theory
I. Lazear’s (2005) Jack‐of‐all‐trades theory
Jack of all trades (master of none)
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University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
4
Chapter 1.5: Entrepreneurship theory
I. Lazear’s (2005) Jack‐of‐all‐trades theory
Entrepreneurs‘ main task: manage resources; put people together and combine them with physical capital and ideas to produceand combine them with physical capital and ideas to produce product or process innovations
Entrepreneurs must know about many different areas
d ll b l h k b l dEntrepreneurs need all abilities; the weakest ability determines income
Entrepreneurs with a balanced skill profile become entrepreneurs
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
5
Chapter 1.5: Entrepreneurship theory
I. Lazear’s (2005) Jack‐of‐all‐trades theoryI di id l d d ith f killIndividuals are endowed with a range of skills
Skill profiles differ between individuals (“generalists”/”specialists”)
Generalists (“jacks‐of‐all‐trades”) become entrepreneurs; they need to assemble production factors and need knowledge in a large
b fnumber of areas
Individuals who become entrepreneurs invest in several skills
Implicit assumption: all tasks have to be performed by one person
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
6
Chapter 1.5: Entrepreneurship theory
I. Lazear’s (2005) Jack‐of‐all‐trades theory
Entrepreneur must fulfill many different tasks
Assumption: constant returns to scale and symmetryAssumption: constant returns to scale and symmetry
Skill endowment: x1, x2; joint density g(x1,x2)
Entrepreneurial choice:
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
7
Chapter 1.5: Entrepreneurship theory
I. Lazear’s (2005) Jack‐of‐all‐trades theory
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
8
Chapter 1.5: Entrepreneurship theory
I. Lazear’s (2005) Jack‐of‐all‐trades theory
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University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
9
Chapter 1.5: Entrepreneurship theory
I. Lazear’s (2005) Jack‐of‐all‐trades theory
Results: 1. Individuals with more balanced skill sets are more likely to
bbecome entrepreneurs.2. The supply of entrepreneurs is smaller for production
processes that require a higher number of independent skillsprocesses that require a higher number of independent skills.3. Individuals who become entrepreneurs should have a more
balanced human capital investment strategy on average than p gy gthose who become specialists.
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
10
Chapter 1.5: Entrepreneurship theory
I. Fabel’s (2004) O‐ring theory
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University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
11
Chapter 1.5: Entrepreneurship theory
I. Fabel’s (2004) O‐ring theory
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University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
12
Chapter 1.5: Entrepreneurship theory
I. Fabel’s (2004) O‐ring theoryDifferent abilities are supplied by different individuals with different abilities
The quality with which a task is fulfilled is essential.
If a group member fails to fulfill her task, the entire project fails
Implications:
Teams are homogenous wrt. abilityg y
The more able the team, the larger it is
The more able the team the more per capita capital is usedThe more able the team, the more per capita capital is used
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
13
Chapter 1.5: Entrepreneurship theory
I. Fabel’s (2004) O‐ring theoryKnowledge of different persons (specialists) necessaryBut: each additional person is additional source of risk output has no market value if someone malperformsno market value if someone malperforms
In equilibrium: homogenous teams wrt. ability; reason: impact of replacement with slightly higher skilled the greater the higherreplacement with slightly higher skilled the greater the higher average ability of other team members
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
14
Chapter 1.5: Entrepreneurship theory
I. Fabel’s (2004) O‐ring theory
Production function:
Property:Property:
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
15
Chapter 1.5: Entrepreneurship theory
I. Fabel’s (2004) O‐ring theory
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University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
16
Chapter 1.5: Entrepreneurship theory
I. Fabel’s (2004) O‐ring theory
Implications:
1. All team members with same abilities in equilibrium
2. The more able team, the more capital per head
3. The more able the team the higher capital requirementsUniversity of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
17
Chapter 1.5: Entrepreneurship theory
References:
Fabel, Oliver (2004), Spinoffs of Entrepreneurial Firms: An O‐Ring Approach, Journal of Institutional and Theoretical Economics, vol. 160 416 438160, 416‐438.
Kremer, Michael (1993), The O‐Ring Theory of Economic Development, The Quarterly Journal of Economcis, vol. 108, no. 3, 551‐575.Q y , , ,
Lazear, Edward P. (2004), Balanced Skills and Entrepreneurship, American Economic Review Papers and Proceedings, 94(2), 208‐211.
Lazear, Edward P. (2005), Entrepreneurship, Journal of LaborEconomics, vol. 23, no. 4, 649‐680.
University of ZurichDepartment of Business AdministrationUlrich Kaiser
A primer in EntrepreneurshipFall Semester 2013
18
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