Schumpeter Meets Pasinetti: Entrepreneurship and Income Distribution

ABSTRACT This paper explores a much‐neglected issue: the relationship between entrepreneurship and income distribution. It does so by combining two major strands of economic thought: Schumpeter's theory of entrepreneurship‐driven innovation (under different specifications) and the Kaldor‐Pasinetti functional income distribution framework. Three models with distinct entrepreneurial activity are studied, namely, trial‐and‐error, entrepreneurial learning, and entrepreneurial ecosystem. We show that, while the equilibrium rate of profits is entirely given by the Cambridge equation in all formulations, a higher degree of entrepreneurship unambiguously increases output, the capital stock, and real wages. Under the assumptions of the models developed in this paper, entrepreneurship can thus be seen as a “rising tide that lifts all boats.” In this context, policy reforms that promote entrepreneurship would foster innovation, productivity, and higher real wages. When entrepreneurs make innovation decisions, we derive an augmented Cambridge equation, where technological choice impacts capital intensity. As a result, entrepreneurship may increase or decrease the capital share.