Transformative and Subsistence Entrepreneurs: Origins and Impacts on Economic Growth

Figure 1: R&D Worker and Entrepreneur by IQ

This figure shows two bar graphs on the same axes, comparing the share of R&D workers and entrepreneurs across IQ deciles.

X-axis: IQ Deciles, ranging from 1 to 10

Y-axis (left): Entrepreneur Share (per 100), ranging from 0 to 7

Y-axis (right): R&D Worker Share (per 100), ranging from 0 to 5

The gray bars represent entrepreneurs:

• It starts high at around 6.5% for the lowest IQ decile
• It decreases steadily as IQ increases
• It ends at about 3.5% for the highest IQ decile

The blue bars represent R&D workers:

• It starts very low at about 0.2% for the lowest IQ decile
• It increases sharply as IQ increases
• It ends at about 4.8% for the highest IQ decile

Key takeaway: As IQ increases, the likelihood of being an entrepreneur decreases, while the likelihood of being an R&D worker increases significantly.

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Figure 2: IQ and Entrepreneurship

This figure shows two bar graphs on the same axes, comparing the share of subsistence entrepreneurs and transformative entrepreneurs across IQ deciles.

X-axis: IQ Deciles, ranging from 1 to 10

Y-axis (left): Subsistence Share (per 100), ranging from 0 to 7

Y-axis (right): Transformative Share (per 100), ranging from 0 to 1.4

The gray bar represents subsistence entrepreneurs:

• It starts high at about 6.2% for the lowest IQ decile
• It decreases steadily as IQ increases
• It ends at about 3% for the highest IQ decile

The red bar represents transformative entrepreneurs:

• It starts low at about 0.3% for the lowest IQ decile
• It increases gradually as IQ increases
• It ends at about 1.2% for the highest IQ decile

Key takeaway: As IQ increases, the likelihood of being a subsistence entrepreneur decreases, while the likelihood of being a transformative entrepreneur increases.

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Figure 3: Multinomial Logit for Career Choice

This figure shows two bar charts side by side, comparing the coefficients from multinomial logit regressions for entrepreneurs and R&D workers.

(a) Entrepreneur

X-axis: Various factors influencing career choice

Y-axis: Coefficient values, ranging from -0.6 to 0.6

Bars (from top to bottom):

• Entrepreneur Parents: Positive, around 0.57
• R&D Worker Parents: Small positive
• High Parental Income: Very small positive
• Production Worker Parents: Small negative
• IQ2: Near zero
• IQ3: Small negative
• IQ4: Negative, around -0.17
• College: Negative, around -0.59

(b) R&D Worker

X-axis: Same factors as in (a)

Y-axis: Coefficient values, ranging from 0.0 to 1.6

Bars (from top to bottom):

• Entrepreneur Parents: Small positive
• R&D Worker Parents: Positive, around 0.46
• High Parental Income: Very small positive
• Production Worker Parents: Near zero
• IQ2: Positive, around 0.43
• IQ3: Positive, around 0.79
• IQ4: Positive, around 1.25
• College: Positive, around 1.60

Key takeaway: Factors influencing career choices differ significantly between entrepreneurs and R&D workers. Higher IQ and college education strongly predict R&D careers but negatively predict entrepreneurship.

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Figure 4: Entrepreneur Type

This figure shows a bar chart comparing the coefficients from multinomial logit regressions for transformative and subsistence entrepreneurs.

X-axis: Various factors influencing entrepreneur type

Y-axis: Coefficient values, ranging from -1 to 1

Bars for each factor show two values:

• Red: Transformative Entrepreneur
• Gray: Subsistence Entrepreneur

Factors (from top to bottom):

• Entrepreneur Parents: Both positive, higher for subsistence
• R&D Worker Parents: Positive for transformative, near zero for subsistence
• High Parental Income: Positive for transformative, near zero for subsistence
• Production Worker Parents: Negative for transformative, positive for subsistence
• IQ2: Positive for transformative, near zero for subsistence
• IQ3: Positive for transformative, negative for subsistence
• IQ4: Strongly positive for transformative, strongly negative for subsistence
• College: Positive for transformative, strongly negative for subsistence

Key takeaway: Higher IQ and college education strongly predict transformative entrepreneurship but negatively predict subsistence entrepreneurship.

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Figure 5: Employment by Entrepreneur Type/Age

This figure shows two line graphs on the same axes, comparing the normalized employment growth of subsistence and transformative entrepreneurs over time.

X-axis: Age (years), ranging from 0 to 10

Y-axis: Normalized Employment, ranging from 1 to 5

The gray line represents subsistence entrepreneurs:

• It starts at 1 (normalized) at age 0
• It increases slightly to about 1.5 by age 2
• It remains relatively flat after that, ending just below 2 at age 10

The red line represents transformative entrepreneurs:

• It starts at 1 (normalized) at age 0
• It increases steadily and more steeply than subsistence entrepreneurs
• It ends at about 5 at age 10

Key takeaway: Transformative entrepreneurs show much stronger employment growth over time compared to subsistence entrepreneurs.

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Figure 6: Model Map

This figure is a flowchart illustrating the key elements and processes of the model. It shows the progression from initial conditions to career choices and firm dynamics. The main components are:

1. Starting point: "Born with talent, parental resources, parental entrepreneurship exposure"
2. First decision: "Career and education choice"
3. Education path: "Pay cost of education with parental income"
4. Career options:
a. "Production worker" b. "R&D worker"
5. Entrepreneurship path: "Entrepreneur"
a. Two types: "Subsistence" and "Transformative"
b. Actions: "Hire production workers" (Subsistence), "Hire production and R&D workers" (Transformative)
6. Firm dynamics:
a. "Exit"
b. "Entry rate"
c. "Startup cost"
7. Outcomes: "Incumbent Innovation & Aggregate Growth"

The flowchart shows connections between these elements, illustrating how initial conditions influence career choices, which in turn affect entrepreneurship types and firm dynamics, ultimately impacting innovation and economic growth.

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Figure 7: Talent Allocation across Types

This figure consists of four separate bar graphs, each showing the distribution of different occupational types across IQ deciles. Each graph compares the model predictions (light blue) to the actual data (darker blue).

(a) Production Worker

X-axis: IQ Deciles, 1 to 10

Y-axis: Share (per 100), ranging from 80 to 100

The graph shows two lines (model and data) that closely overlap, both starting high (around 98%) for low IQ deciles and decreasing to about 85% for the highest IQ decile.

(b) R&D Worker

X-axis: IQ Deciles, 1 to 10

Y-axis: Share (per 100), ranging from 0 to 6

Both model and data lines start near 0% for low IQ deciles and increase steadily, reaching about 5% for the highest IQ decile.

(c) Non-transformative entrepreneur

X-axis: IQ Deciles, 1 to 10

Y-axis: Share (per 100), ranging from 0 to 7

Both lines start around 6% for low IQ deciles and decrease to about 3% for the highest IQ decile.

(d) Transformative entrepreneur

X-axis: IQ Deciles, 1 to 10

Y-axis: Share (per 100), ranging from 0 to 1.6

Both lines start near 0% for low IQ deciles and increase gradually, reaching about 1.2% for the highest IQ decile.

Key takeaway: The model closely matches the empirical data for the distribution of occupational types across IQ levels.

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Figure 8: Untargeted Moments: Share of Transformative Entrepreneurs

This figure consists of two line graphs showing how the share of transformative entrepreneurs changes with firm age.

(a) Share of Transformative Entrepreneurs

X-axis: Age, 0 to 10 years

Y-axis: Count Share, ranging from 0.12 to 0.19

Both model (gray) and data (blue) lines start around 0.13 at age 0 and increase steadily to about 0.18 by age 10.

(b) Employment Share of Transformative Entrepreneurs

X-axis: Age, 0 to 10 years

Y-axis: Employment Share, ranging from 0.10 to 0.34

Both model and data lines start around 0.13 at age 0 and increase more steeply than in (a), reaching about 0.32 by age 10.

Key takeaway: The model accurately predicts the increasing share of transformative entrepreneurs and their employment share as firms age.

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Figure 9: Firm Life Cycle by Schooling and Parental Entrepreneurship

This figure shows a line graph comparing the relative employment creation for individuals with different combinations of education and parental entrepreneurship background over their lifetime.

X-axis: Age, ranging from 0 to 50 years

Y-axis: Relative Employment Creation, ranging from 1.0 to 5.0

Three lines are shown:

1. Blue solid line (f=1, s=0): Parental exposure to entrepreneurship, no higher education
2. Black dashed line (f=0, s=1): No parental exposure, with higher education
3. Red dash-dotted line (f=1, s=1): Both parental exposure and higher education

Key observations:

• The red line (f=1, s=1) shows the highest employment creation, reaching about 4.5 by age 50.
• The black line (f=0, s=1) starts lower but increases more steeply, surpassing the blue line around age 15.
• The blue line (f=1, s=0) shows steady but slower growth, reaching about 2.5 by age 50.

Key takeaway: The combination of higher education and parental entrepreneurship exposure leads to the highest employment creation over an individual's career.

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Figure 10: Alleviating Financial Frictions by Family Background

This figure is a bar chart comparing occupation shares for individuals with different parental income levels, both in the baseline scenario and without financial frictions.

X-axis: Two groups - "Parental Income Below Median" and "Parental Income Above Median"

Y-axis: Occupation Share (per 100), ranging from 0 to 5

For each group, there are two sets of three bars each:

1. Baseline scenario
2. Without Financial Frictions scenario

The three bars in each set represent:

• Subsistence Entrepreneur (gray)
• R&D Worker (blue)
• Transformative Entrepreneur (red)

Key observations:

• For low parental income: R&D worker share increases significantly without financial frictions.
• For high parental income: R&D worker share decreases slightly without financial frictions.
• Transformative entrepreneur share increases for both income groups without financial frictions.
• Subsistence entrepreneur share decreases slightly for both groups without financial frictions.

Key takeaway: Alleviating financial frictions increases access to R&D careers and transformative entrepreneurship, especially for those from lower-income backgrounds.

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Figure 11: Alleviating Financial Frictions by IQ

This figure is a bar chart showing the change in occupation shares across IQ quartiles when financial frictions are alleviated.

X-axis: IQ Quartiles, 1 to 4

Y-axis: Share Difference (percentage points), ranging from -0.1 to 0.3

For each IQ quartile, there are three bars representing the change in share for:

• Subsistence Entrepreneur (gray)
• R&D Worker (blue)
• Transformative Entrepreneur (red)

Key observations:

• R&D Worker share increases across all IQ quartiles, with larger increases in higher quartiles.
• Transformative Entrepreneur share also increases, with larger increases in higher IQ quartiles.
• Subsistence Entrepreneur share decreases across all quartiles, with larger decreases in higher quartiles.

Key takeaway: Alleviating financial frictions leads to a shift towards R&D and transformative entrepreneurship, especially among higher-ability individuals.

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Figure 12: Alleviating Financial Frictions: Firm Outcomes

This figure consists of three line graphs showing how alleviating financial frictions affects firm outcomes over time.

(a) Average Employment of Transformative Firms

X-axis: Age, 0 to 10 years

Y-axis: Relative Employment, ranging from 1.00 to 1.03

The line shows that without financial frictions, transformative firms have slightly higher relative employment, increasing from 1.00 at age 0 to about 1.03 at age 10.

(b) Share of Transformative Firms

X-axis: Age, 0 to 10 years

Y-axis: Count Share, ranging from 0.12 to 0.20

Two lines are shown:

• Baseline (grey): Starts at about 0.13 and increases to about 0.18 by age 10
• No financial frictions (blue): Starts slightly higher and increases more steeply, reaching about 0.20 by age 10

(c) Employment Share of Transformative Firms

X-axis: Age, 0 to 10 years

Y-axis: Employment Share, ranging from 0.12 to 0.36 Two lines are shown:

• Baseline (grey): Starts at about 0.13 and increases to about 0.32 by age 10
• No financial frictions (blue): Starts slightly higher and increases more steeply, reaching about 0.35 by age 10

Key takeaway: Alleviating financial frictions leads to a higher share of transformative firms and a larger employment share for these firms as they age.

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Figure 13: Firm Outcomes under Policies

This figure consists of three line graphs comparing firm outcomes under different policy scenarios.

(a) Average Employment of Transformative Firms

X-axis: Age, 0 to 10 years

Y-axis: Relative Employment, ranging from 0.96 to 1.06

Four lines are shown:

• Baseline (grey): Remains at 1.00 throughout
• Incumbent R&D Subsidy (light blue): Slightly above baseline, reaching about 1.02 by age 10
• Innovative Startup Subsidy (medium blue): Starts below baseline but increases to about 1.00 by age 10
• Education Subsidy (dark blue): Starts above baseline and increases to about 1.06 by age 10

(b) Share of Transformative Firms

X-axis: Age, 0 to 10 years

Y-axis: Count Share, ranging from 0.12 to 0.22

Four lines are shown, all increasing over time:

• Baseline (grey): Lowest line, reaching about 0.18 by age 10
• Incumbent R&D Subsidy (light blue): Slightly above baseline
• Innovative Startup Subsidy (medium blue): Highest line, reaching about 0.21 by age 10
• Education Subsidy (dark blue): Second highest, close to Innovative Startup Subsidy

(c) Employment Share of Transformative Firms

X-axis: Age, 0 to 10 years

Y-axis: Employment Share, ranging from 0.12 to 0.40

Four lines are shown, all increasing over time:

• Baseline (grey): Lowest line, reaching about 0.32 by age 10
• Incumbent R&D Subsidy (light blue): Slightly above baseline
• Innovative Startup Subsidy (medium blue): Third highest
• Education Subsidy (dark blue): Highest line, reaching about 0.39 by age 10

Key takeaway: Education subsidies appear to be the most effective policy for increasing the share and employment of transformative firms over time.

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Figure C1: Firm life cycle, with transformative definition based on first 5 years

The grey line represents subsistence entrepreneurs:

• It starts at 1 (normalized) at age 0
• It increases slightly to about 1.5 by age 2
• It remains relatively flat after that, ending just below 2 at age 10

The red line represents transformative entrepreneurs:

• It starts at 1 (normalized) at age 0
• It increases steadily and more steeply than subsistence entrepreneurs
• It ends at about 4.5 at age 10

Key takeaway: Even when defining transformative entrepreneurs based on their first 5 years, they still show significantly stronger employment growth compared to subsistence entrepreneurs over a 10-year period.

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Figure C2: Firm life cycle, Revenue

This figure is similar to C1 but it shows firm revenue instead of employment.

X-axis: Age, ranging from 0 to 10 years

Y-axis: Normalized Revenue, ranging from 1 to 7

The gray line represents subsistence entrepreneurs:

• It starts at 1 (normalized) at age 0
• It increases slightly to about 1.5 by age 2
• It remains relatively flat after that, ending just above 2 at age 10

The red line represents transformative entrepreneurs:

• It starts at 1 (normalized) at age 0
• It increases steadily and more steeply than subsistence entrepreneurs
• It ends at about 7at age 10

Key takeaway: The pattern of stronger growth for transformative entrepreneurs holds even when using revenue.

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Figure C3: Firm life cycle, Exit Rates

This figure shows the exit rates for both transformative and subsistence firms over the first decade of their operation. The x-axis represents the age of the firm from 0 to 10 years, while the y-axis shows the exit rate, ranging from 0 to 0.20 (or 0% to 20%).

Key observations from the figure:

1. Both transformative and subsistence firms have relatively high exit rates in their early years.
2. Subsistence firms start with a higher initial exit rate of approximately 16%, compared to 12% for transformative firms.
3. The exit rates for both types of firms generally decline with age, suggesting a selection effect where surviving firms become increasingly stable over time.
4. Subsistence firms show a steeper initial decline in exit rates during the first five years.
5. By year 8, both firm types converge to similar exit probabilities of around 8-9%.
6. Overall, transformative firms demonstrate slightly lower exit rates, suggesting that their investments in R&D and growth may be associated with greater firm stability and longevity.

This figure supports the paper's argument that transformative entrepreneurs, who invest in R&D and hire R&D workers, tend to create more stable and long-lasting firms compared to subsistence entrepreneurs.

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Figure C4: Firm Industry by Entrepreneur IQ

This figure shows stacked bars of share of entrepreneurs for several industries by IQ deciles. The x-axis represents IQ deciles from 1 to 10. The y-axis shows the share of entrepreneurs in each industry.

Different colored lines represent various industries (e.g., manufacturing, professional services, retail, construction, information technology).

The graph demonstrates how the distribution of entrepreneurs across industries changes with IQ:

• Bars representing knowledge-intensive industries show an upward trend as IQ increases.
• Bars representing less skill-intensive industries show a downward trend as IQ increases.
• Some industries may show relatively stable shares across IQ deciles.

This graph illustrates the relationship between an entrepreneur's cognitive abilities and the type of industry they enter.

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Figure C5: Corporate and Non-Corporate firms by entrepreneur IQ

This figure shows two bar graphs on the same axes. The x-axis represents IQ deciles from 1 to 10. The y-axis shows the share of entrepreneurs per 100 individuals.

• The light green line represents non-corporate firms.
• The dark green line represents corporate firms.

The graph demonstrates how the likelihood of starting a corporate or non-corporate firm changes with entrepreneur IQ:

• The bar for non-corporate firms shows a downward trend as IQ increases, indicating that higher-IQ entrepreneurs are less likely to start non-corporate firms.
• The line for corporate firms shows an upward trend as IQ increases, suggesting that higher-IQ entrepreneurs are more likely to start corporate firms.

This graph illustrates the relationship between an entrepreneur's cognitive abilities and the legal structure of the firms they create, with higher-IQ individuals more likely to establish corporate entities.

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