Social Capital, Scale Economies of Skills and the Equilibrium Number of Entrepreneurs

This paper draws on occupational choice theory to explain that observed differences in shares of entrepreneurs as self-employed across countries, may respond to differences in social capital as a support of generalized trust. With a (incomplete) panel data from 63 countries, for a period of 25 years, we find that higher social capital is negatively associated with the share of self-employed who hire employees, and positively with the average number of employees per employer. The results are consistent with the hypothesis that environments of high trust allow entrepreneurs, as employers, to implement more decentralized organization structures and to take advantage of the scale economies of skills in entrepreneurial decisions, leading to a market equilibrium with fewer firms under the direction of high-skilled entrepreneurs. The paper also highlights the importance of treating the self-employed as a heterogeneous group of employers and solo self-employed in entrepreneurship research