Entrepreneurial Innovation, Economic Growth and the Stigma of Failure

This contribution proposes a model of entrepreneurial activity highlighting a complex relationship between innovation and stigma of failure. Innovation decisions are examined in an endogenous growth model with horizontal differentiation in the spirit of Romer (1990). In our framework, entrepreneurs decide to invent a new good, given entrepreneurial talent and production costs, and face a risk of failure. If an entrepreneur fails in this innovation process, the firm remains on the market but bears a stigma of failure. We then analyze how the risk and the stigma of failure affects business dynamism and economic growth. We show that while a higher risk of failure is detrimental to innovation and growth, it positively affects the returns to entrepreneurial talent (or equivalently the comparative advantage of successful innovators). On the contrary, a higher stigma of failure inhibits entrepreneurial creation but might be beneficial for growth. These results are supported by recent empirical evidence in OECD countries