Entrepreneurship and business cycles: technological innovations and unemployment

Koellinger and Thurik (2012) find that entrepreneurship Granger-causes the cycles of the world economy, and that entrepreneurial cycles are positively affected by the national unemployment cycles. However they do not present a theoretical model to explain the empirical findings. This paper provides a theoretical explanation through an extended Ramsey model in which a differential equation describing technological innovations led by entrepreneurs, which relates entrepreneurship dynamics to unemployment and output dynamics, is considered as an additional dynamic restriction. The model generates limit cycles through the Hopf bifurcation theorem. The necessary condition for the existence of a limit cycle is that the entrepreneurial economy accumulates more capital than the Ramsey model, yielding that entrepreneurial and unemployment cycles cause business cycles.