Academic journal article International Journal of Entrepreneurship

Information Limits on Entrepreneurs: An Economic Perspective

Academic journal article International Journal of Entrepreneurship

Information Limits on Entrepreneurs: An Economic Perspective

Article excerpt

ABSTRACT

Formal economic models of entrepreneurship have been rare because so much of Economics has been developed under the assumption of perfect information. However, two economists, Casson and Hayek, have explored the assumption of imperfect information and the limited capability to process information. Their contributions are extended and integrated to develop a description of entrepreneurial behavior and the institutions that accommodate such behavior.

Specifically, an entrepreneur is viewed as a specialist who learns to be parsimonious in decision making by depending on intuition and making choices with little information. The institutions that accommodate entrepreneurs are capable of a delicate balance between letting entrepreneurs protect their commercial information while simultaneously making it easy to coordinate resource reallocation. Entrepreneurs can be expected to play roles in the early history of a product as they help create a market and then to exit as competition arrives. Entrepreneurs develop new niches closely related to their own experience but new enough to avoid competitors.

INTRODUCTION

Early economists (Cantillon, Say, and Mill) called enterprising people who undertook projects "entrepreneurs." However, through the end of the twentieth century, economic theory developed without including a formal analysis of the entrepreneur. With respect to developing "an illuminating formal analysis of entrepreneurship," William Baumol (1968) stated "I shall conclude it is unlikely to do so for the foreseeable future." While Baumol has been correct for the last thirty years, several economists have productively focused on the information constraints facing the entrepreneur. This paper integrates contributions of several major economists to outline a theory of entrepreneurial institutions and behavior based upon such information constraints.

ENTREPRENEURS AS SPECIALISTS IN DECISION MAKING

A decade after Baumol's pessimistic forecast about formal analysis of entrepreneurship, Mark Casson has outlined a formal economic theory of the entrepreneur which encompasses contributions by many earlier economists (Casson, 1987). Consistent with the fundamental economic problem of resource scarcity, Casson (1982) defines an entrepreneur in terms of a resource reallocation role:

   An entrepreneur is someone who specializes in taking judgmental
   decisions about the coordination of scarce resources (Casson,
   1982).

As a specialist in decision-making, Casson's entrepreneur does not necessarily Own the institutions or resources upon which the entrepreneur makes decisions. The entrepreneur's role in coordinating resources is a dynamic search for opportunities to change how resources are being used:

   Coordination may be defined as a beneficial reallocation of
   resources. Coordination is thus a dynamic concept, as opposed to
   allocation, which is static one. The concept of coordination
   captures the fact that the entrepreneur is an agent of change
   (Casson, 1982).

In this way, he is consistent with Schumpeter's (1934) distinction between the capitalists who own resources and entrepreneurs who make decisions about how to reallocate resources.

An entrepreneur has to interact, communicate, and bargain with a community of resource owners for the "market right" to use the property rights of others. With those "market rights" it is then possible to make decisions for the purpose of building a "market-making firm." The "market-making firm" is more than the neoclassical economic firm that converts resources into goods and services. The entrepreneur coordinates the use of resources, not only to produce goods or services, but also to create the market in which to sell those goods and services. But what decides which entrepreneur achieves a successful market-making firm? Casson finds the answer in differences in access to information. …

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