Doctoral Track and Conference
ENTREPRENEURSHIP, CULTURE, FINANCE AND ECONOMIC
DEVELOPMENT
“HIGH EDUCATION, SUNK COSTS AND
ENTREPRENEURSHIP”
Jean Bonnet*, Pascal Cussy**, Robert Owen***
* Ass. Professor, Faculty of Economics and Business Administration, University of Caen, CREM, France,
[email protected]
** Ass. Professor, Faculty of Economics and Business Administration, University of Caen, CREM, France,
[email protected]
***Professor of Industrial Organization, University of Nantes, France, [email protected]
Jean Bonnet University of CAEN
Pascal Cussy University of CAEN
Robert Owen University of NANTES
1
Entrepreneurial Choice
 Becoming an Entrepreneur
 Microeconomic decision about the proper
allocation of one’s human capital,
 Trade-off between:
 A reward expectation (monetary but also
symbolic, social or psychological)
 A wage position (opportunity cost)
2
Classical approach: pull versus push
entrepreneurs
 Pull mainly driven by positive motives
(Innovative projects, expectation of
important monetary reward )
 Push mainly driven by negative motives
(low opportunity costs and a mean to
avoid human capital depreciation)
3
Innovation in
existing firms
Non for profit
organization
Corporate
venturing
Classical:
Shop-keepers
Household services
etc….
Start-up
Spin off
• Graphic From Erik Stam (2008)
 Baumol (2004):
 Existing firms: Incremental Innovations
 Individual: Breakthroughs Innovations
 (Spin-off, Start-up)
4
Labor market Push against Pull
1994
1998
2002
2006
Previous activity before the setting-up of the firm (in %age)
Working population
42,2 %
50,3
53,8
51
Unemployed
43,8
34,8
32,8
40
Non working
14,0
14,9
13,4
9
population
Population of new entrepreneurs
 Push motives very important in France (not an affair of policy –
subsidies etc… much more a functioning of the labor market)
 Push motives deter Pull motives

(Wennekers -2006-) rate of unemployment negative
correlation with Entrepreneurship
5
Highly educated people, entrepreneurship and
growth
 In innovative societies , information
asymmetries , importance of the individual ,
Audrestch (1995)
 Increase of self-employed educated people in the USA
13% (1993) to 20% (2001), and huge increase of the
earnings for educated self-employed people (Terajima,
2006)
 In France, according to Fayolle (in the population of
engineers 9% are entrepreneurs that represents only
2% of the total population of entrepreneurs).
6
Sunk costs deter Pull entrepreneurs
 Too few highly educated people engage in an
Entrepreneurial venture
 “The propensity to set up a firm when you are
engineer is inversely proportional to the
notability of the School” (Fayolle, 2001)
 Possible explanation : imperfect competition
on the labor market creates a sunk cost
 Origin in this case: the loss of reputation and
networks effects
7
Loss of reputation and Networks effects
Three trajectories are represented here :
-normal trajectory (the individual follows the normal path of his carrier)
-the individual has set up a firm but is coming back on the labour
market (in T and T’, there is a decrease in his wages expectancies)
8
Entrepreneurial choice
9
Entrepreneurial choice continued
Staying a wage earner
W
Becoming an entrepreneur
s
s
1
W
s
2
W
First period
Second period
W1e
W
e
2
e
W2r
W2
Random wealth
With X a lottery game which is expressed by
We
W1e
X
W2e
W2r
q
1 q
X
10
Entrepreneurial choice continued
When beginning the project induces losses (opportunity costs) that will
be eventually compensated in the second period (after the revision
process).
Then we have W
e
2
e
W2
s
2
e
1
W and W
W
e
2
Ws
W2s
Random wealth
With X a lottery game which is expressed by
We
W1e
X
W2e
W2r
q
1 q
X
11
Entrepreneurial choice continued
Three states of the world, in T revision process
-good state “gazelle” , continuation of the activity
-bad state “not a very lucrative firm” , come back to a salaried position with sunk costs
(loss of reputation and networks effects)
-average state (stay in entrepreneurship –loss of a part of the total sunk costs )
Backward induction, this sunk cost reduces the incentive to set up a firm.
12
Entrepreneurial choice innovative project
13
Conclusive remarks
 Imperfection on the labor market creates
a sunk cost:
 Origin in this case: the loss of reputation and
networks effects
 Sub-optimal situation
Insufficient Entrepreneurship by the population “a
priori” the more able to set up innovative firms
(“gazelles”)
Young talented French people (USA – Silicon Valley)
Venture capital + More active labor market=better
reward of their experience
14