Cultural transmission and persistence of entrepreneurship

Abstract

This paper contributes to explain the persistence of differences in levels of entrepreneurship within and across countries. We provide an explanation based on the dynamic interplay between purposeful intergenerational transmission of preferences for entrepreneurship and public administration efficiency. Individuals vote on taxes, and the collected taxes fund the civil servants’ wages. The performance of the administration generating an efficient normative and regulatory environment, affects the success of entrepreneurship. We show that an economy can reach two different long-run equilibria: a traditional equilibrium, with a low proportion of entrepreneurs, high taxes and an inefficient administration and, an entrepreneurial equilibrium with a high proportion of entrepreneurs and, lower taxes but enough to implement an efficient administration. The equilibrium achieved depends on the tax policy followed by the different generations. If decisions are made by majority voting in a myopic way, then the initial conditions of the society become crucial. This result explains persistence: an economy evolves around similar levels of entrepreneurship unless some reforms are implemented.