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The economics of entrepreneurship explains how economic conditions and incentives affect entrepreneurship, and how the actions of entrepreneurs in turn affect the broader economy.
For instance, the trade-off between expected financial returns and the risks of those returns affect the decisions of employees to become entrepreneurs.
Also, this trade-off and economic incentives (financial inducements, for example, the prospect of a healthy profit) more generally affect the hiring and investment decisions that entrepreneurs make when they establish and grow their businesses. At the same time, these saving and investment decisions affect aggregate wealth accumulation in the economy, while entrepreneurs’ hiring decisions affect an economy’s aggregate employment and unemployment rates.
The economics of entrepreneurship also analyses:
• the effects of borrowing constraints on rates of entrepreneurial entry and performance;
• the role played by entrepreneurs in stimulating employment and innovation growth in the economy;
• the existence of market failures in entrepreneurial economies and the scope for public policy to design programmes to correct these failures;
• how incentives within incumbent firms stimulate entrepreneurial spin-offs and the effects those have on the broader economy;
• identification of the economic determinants of growth, at the levels of the venture, the region and the economy as a whole.