Skill-Biased Change in Entrepreneurial Technology

In contrast to the very large literature on skill-biased technical change among workers, thereis hardly any work on the importance of skills for the entrepreneurs who employ thoseworkers, and in particular on their evolution over time. This paper proposes a simple theory ofskill-biased change in entrepreneurial technology that fits with cross-country, historical andmicro evidence. For this, it introduces two additional features into an otherwise standardoccupational choice, heterogeneous firm model à la Lucas (1978): technological changedoes not benefit all potential entrepreneurs equally, and there is a positive relationshipbetween an individual’s potential payoffs in working and in entrepreneurship. If some firmsconsistently benefit more from technological progress than others, they stay closer to thefrontier, and the others fall behind. Because wages rise for all workers, low-productivityentrepreneurs will then at some point exit and become workers. As a consequence, theentrepreneurship rate falls with income per capita, average firm size and firm size dispersionincrease with income per capita, and “entrepreneurship out of necessity” falls with income percapita. The paper also documents, for two of the facts for the first time, that these are exactlythe relationships prevailing in cross-country data. Quantitatively, the model fits the U.S.experience well. Using the parameters from a calibration to the U.S., the model also explainscross-country patterns quite well....