https://doi.org/10.1007/s11187-018-0089-2

Cultural transmission and persistence of entrepreneurship

G. Olcina ·E. M. Tur ·L. Escriche

Accepted: 25 July 2018© The Author(s) 2018

Abstract This paper contributes to explain the per-sistence of differences in levels of entrepreneurshipwithin and across countries. We provide an expla-nation based on the dynamic interplay between pur-poseful intergenerational transmission of preferencesfor entrepreneurship and public administration effi-ciency. Individuals vote on taxes, and the collectedtaxes fund the civil servants’ wages. The performanceof the administration generating an efficient norma-tive and regulatory environment, affects the successof entrepreneurship. We show that an economy can

G. OlcinaFaculty of Economics, University of Valencia and ERICES,Avda dels Tarongers s/n, Valencia, Spaine-mail: Gonzalo.Olcina@uv.es

E. M. Tur (�)School of Innovation Sciences, Eindhoven Universityof Technology, Eindhoven, Netherlandse-mail: E.M.Mas.Tur@tue.nl

E. M. TurINGENIO (CSIC- UPV), Universitat Politecnica deValencia, Valencia, Spain

E. M. TurInstitute of Innovation and Entrepreneurship,School of Business, Law and Economics,University of Gothenburg, Gothenburg, Sweden

L. EscricheUniversity of Valencia and ERICES, Valencia, Spaine-mail: Luisa.Escriche@uv.es

reach two different long-run equilibria: a traditionalequilibrium, with a low proportion of entrepreneurs,high taxes and an inefficient administration and, anentrepreneurial equilibrium with a high proportion ofentrepreneurs and, lower taxes but enough to imple-ment an efficient administration. The equilibriumachieved depends on the tax policy followed by thedifferent generations. If decisions are made by major-ity voting in a myopic way, then the initial conditionsof the society become crucial. This result explains per-sistence: an economy evolves around similar levelsof entrepreneurship unless some reforms are imple-mented.

Keywords Entrepreneurship ·Cultural transmission · Entrepreneurial preferences ·Tax policy · Public administration efficiency

JEL Classification L26 · Z10 · D01 · H20

1 Introduction

Entrepreneurship is a key aspect of economicdynamism as it determines productivity, innovation,and economic growth (see Schumpeter 1934; Wen-nekers and Thurik 1999; Minniti 1999; Audretsch andThurik 2001, for example).1 Reynolds et al. (1999)

1See Wennekers and Thurik (1999) for a survey of how eco-nomic growth is linked to entrepreneuship.

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show that variations in rates of entrepreneurship mayaccount for one third of the variation in economicgrowth.

The persistent difference in entrepreneurshipwithin or across countries is a well-known stylizedfact. Comparing countries, Freytag and Thurik (2007)show differences that endure for more than fourdecades, so the ranking between countries is quitestable (Reynolds et al. 2002).2 Concerning regions,Fritsch andWyrwich (2014), for example, observe thatthe regional differences in Germany tend to be per-sistent as long as periods of 80 years, despite abruptand drastic changes in the political-economic envi-ronment. This is not an isolated case since, as theseauthors point out, the regional start-up rates tend tobe relatively persistent over periods of one or twodecades in other regions as the Netherlands (van Steland Suddle 2008), Sweden (Andersson and Koster2011), the UK (Mueller et al. 2008), and the USA (Acsand Mueller 2008).

This paper presents a theoretical model thatexplains the persistence of differences in levels ofentrepreneurship among economies. Our model takesinto account the interaction between intergenerationaltransmission of entrepreneurial traits (culture) andefficiency of the administration (institutions). Weobtain that an economy can converge to two dif-ferent long-run equilibria. The first one is a tradi-tional economy, with few entrepreneurs, high taxesand an inefficient administration. The second oneis an entrepreneurial economy with predominantlyentrepreneurial traits, lower taxes and a more effi-cient administration and a higher per capita income.We show that the equilibrium achieved depends com-pletely on the tax policy followed by the differentgenerations.

1.1 Evidence and related literature

Culture and institutions play a crucial role in explain-ing the level of entrepreneurship and especiallythe persistence of entrepreneurship (Wennekers andThurik, 1999; Wennekers et al. 2005, for instance). AsFreytag and Thurik put it (2007, p.121), “the persistentdifferences between countries point to non-economic

2Freytag and Thurik (2007) present an illustrative figure withthe development of the rate of entrepreneurship for six countriesof the 23 of the Compendia data set (van Stel et al. 2005) from1973 to 2006.

causes, such as cultural factors, which have a tendencyto remain relatively stable over time.” We understandculture as the prevailing norms or values of an econ-omy, whereas the institutions refer to the rules andlaws of the environment where the businesses areconducted.3

Entrepreneurship and culture. The values or pref-erences of an individual affect the decision to becomean entrepreneur. These values can be risk tolerance,autonomy, striving for independence, mastery, indi-vidualism, or an aggregate trait that we will nameas preferences for entrepreneurship. Many studiesshow that entrepreneurial preferences are transmit-ted among generations (Chlosta et al. 2012; Dohmenet al. 2011; Laspita et al. 2012). For example, acrucial determinant of entrepreneurship, willingnessto take risk, is transmitted from parents to children(Dohmen et al. 2011 and De Paola, 2012). Wyrwich(2015) studies the relationship between entrepreneur-ship and mastery, in the sense of challenging existingconditions, finding evidence of an intergenerationaltransmission of values from parents to children. Hund-ley (2006) provides support for the effects of skillsand values that are specifically acquired from expo-sure to a self-employed parent on the self-employmentchoice. Lindquist et al. (2015) show that parentalentrepreneurship increases the probability of chil-dren’s entrepreneurship by about 60% and presentsuggestive evidence in favor of role modeling. Hoff-mann et al. (2015) also found evidence about theparental role models in entrepreneurship. Economictheory also provides an extended literature on theintergenerational transmission of values since the pio-neering paper by Bisin and Verdier (2001).4 Recently,Chakraborty et al. 2016 have also considered thisframework to connect culture to entrepreneurship andeconomic growth.

Entrepreneurship and institutions.Besides culture,another determinant of entrepreneurship is the qualityof the institutions (Acs and Amoros 2008). Institu-tions are crucial because of their role in ensuring theprotection of property rights, the objective resolution

3”Relevant institutions include fiscal legislation (tax ratesand tax breaks), the social security system influencing therewards and the risks of entrepreneurship, and the administra-tive requirements for starting a new business.” (Wennekers et al.2005, p. 300)4See Bisin and Verdier (2011b) for a survey of this literature.

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of contracts and other legal disputes, and the govern-ment’s transparency (van Stel et al. 2005). The OECD-Eurostat Entrepreneurship Indicator Programme (EIP,2009) indicates that entrepreneurship requires a good,clear, and enforceable regulatory framework. Afonsoet al. (2005) elaborate an Administration Oppor-tunity Indicator that takes into account corruption,red tape (concerning regulatory environment), qual-ity of the judiciary (concerning the confidence inthe Administration of justice), and the size ofthe shadow economy. The correlation between theentrepreneurship rate and this Administration Oppor-tunity Indicator offers a positive and significant valueof 0.42.5 Klapper et al. (2010) also find a posi-tive and significant relationship between both the“ease of doing business index” and the entry andnew firm density rates per country.6 They estimatethat for every 10 percentage point decrease in entry costs,density and entry rate increase by about 1%.

1.2 Key features of the model

Our model explicitly analyzes the interaction amongpreferences and institutions when preferences are het-erogeneous in the population and evolve over time. Inthis Section, we describe its key features.

Concerning the first element, preferences, we con-sider that each adult chooses between becoming anentrepreneur or not, in which case, he will work asa civil servant or as a routine producer. The choicedepends on his preferences. Preferences are trans-mitted among generations during the socializationprocess. As in Bisin and Verdier (2011b), the modelconsiders that the values or attitudes may be transmit-

5Correlation between Total Entrepreneurial Activity Rate(TEA) and Administration Opportunity Indicator for thosecountries that appear in both sources of data in 2000. Source:own elaboration based on data from Afonso et al. (2005) andGlobal Entrepreneurship Monitor, GEM (Autio, 2005). TEA:proportion of adults involved in creation of nascent firms(3 months) and proportion involved in surviving firms (42months).6The Doing Business Report includes a ranking of this “easeof doing business index” . A high position in the ease of doingbusiness ranking means that the regulatory environment is moreconducive to the starting and operation of a local firm. Theindex is constructed as the simple average of the countries’percentile rankings on 10 topics: Starting a business, Dealingwith licenses, Employing workers, Registering property, Get-ting credit, Protecting investors, Paying taxes, Trading acrossborders, Enforcing contracts, and Closing a business.

ted (at a cost) from parents to children or by societyat large, in other words, there exists direct transmis-sion and oblique transmission. Parents try to shape thepreferences of their children taking into account thepotential gains of the children’s occupational choicewhen they become adults. If parents do not succeedin transmitting their chosen preferences, then chil-dren acquire preferences from the social environmentwhere they grow up.

Concerning the second element, the quality ofinstitutions, we consider that the efficiency of theadministration determines the expected profits fromentrepreneurial activity. Specifically, if an individ-ual decides to become an entrepreneur and start arisky project, the probability of success will cru-cially depend on the level of efficiency and the sizeof the administration. By efficiency of the admin-istration, we mean the effort made to generate afriendly normative and regulatory framework for busi-ness, although it can have other alternative inter-pretations, such as the absence of corruption inthe public sector.7 Bureaucracy (and civil servants)will make its decision on efficiency pursuing itsown interests depending on the total payoff theyobtain. Wages of civil servants are paid with col-lected taxes; it is assumed that there is a balancedpublic budget. Specifically, the model assumes thatonly entrepreneurs are net contributors. Therefore,entrepreneurs face a trade off: high taxes mean thatthey appropriate a low proportion of their income,but it also means that the efficiency of the administrationis high. Consequently, the expected gross profits canbe high. The level of taxation is decided by some polit-ical process. In this paper, it will be chosen by majorityvoting, but obviously, we can also make clear predic-tions to political situations where the decisive politicalagent is not necessarily the median voter.

7To interpret the efficiency of the Administration as absence ofcorruption, the distribution of ethics among the officials shouldbe considered. This can be implemented by considering thatcivil servants could be either honest or dishonest as in Haukand Saez-Marti (2002) or that they may exhibit public servicemotivation or not as in Delfgaauw and Dur (2008). A moregeneral model will analyze the coevolution of these traits andthe preferences for entrepreneurship. In this paper we focus onthe efficiency of the Administration as observable and valuableitems which can be measured by indicators such as for instance,the ”easy doing business”.

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1.3 Main findings

The main result of the paper is that the persistentdifferences in entrepreneurship across economies canbe explained by two factors: the initial conditions ofthe economy and the taxation level on entrepreneurialearnings. We first show that an economy can reachtwo different long-run equilibria where the socializa-tion efforts of entrepreneurs and non-entrepreneursparents to transmit their preferences are balanced. Thefirst equilibrium is a traditional economy, with a lowproportion of entrepreneurs, high confiscatory taxes,and an inefficient administration. The second possi-ble equilibrium is an economy with predominantlyentrepreneurial traits, lower taxes (but high enough toimplement an efficient administration), and a higherper capita income. Taxes will be higher and the publicsector will be less efficient in a traditional equilibrium,corroborating that high levels of taxation, corruption,and bureaucratic obstacles to start a business candiscourage entrepreneurship (Lee and Gordon, 2005;Klapper et al. 2006, 2010; Ciccone and Papaioannou,2007; Cullen and Gordon, 2007; Djankov et al. 2010).

Our model shows that the tax rate on entrepreneurialprofits implemented by the previous generations com-pletely determines whether an economy achieves a tra-ditional equilibrium or an entrepreneurial equilibrium.If tax decisions are made by majority voting in a myopicway, then the initial conditions of the economy becomecrucial. That is, for an economy with an initial major-ity of non-entrepreneur individuals, the dynamics willmove the economy towards the non-entrepreneurialsteady state, as they will vote for the highest taxes.These confiscatory tax policy reinforces the supe-rior incentives of non-entrepreneurs to transmit theirpreferences consolidating their majority. Conversely,an economy with a majority of entrepreneurs will set up amoderate tax on entrepreneurial profits just high enoughto afford an efficient administration, and the dynamicswill move the economy towards the entrepreneurialsteady state. This efficient tax policy guarantees thatentrepreneurs have enough incentives to transmit theirpreferences.

In the end, if individuals vote myopically, theultimate determinant of where the economy estab-lishes in the long run is the initial proportion ofentrepreneurs and productivity. This fact explains per-sistence: an economy evolves around similar levels of

entrepreneurship as in the initial situation unless somestructural changes are implemented.

However, if individuals are forward-looking andthey are concerned about the welfare of future gen-erations, they might try to implement some taxreform in order to drive the economy towards anentrepreneurial society. In the entrepreneurial equilib-rium, both entrepreneurs and non-entrepreneurs obtaina higher payoff than in the traditional one. We discussdifferent alternatives in order to establish a credi-ble intergenerational commitment to never set con-fiscatory taxes in the future and to compensate theshort-run losses for non-entrepreneurs with a subsidy.

The paper is organized as follows. Section 2 intro-duces the static model, describing the game playedby each generation. Section 3 characterizes the dif-ferent equilibria of the game played within a gen-eration between administration and voters. Section 4describes the cultural transmission of preferences andthe evolution of the proportion of entrepreneurs in thepopulation. Section 5 characterizes the long-run equi-libria of the society. Section 6 compares the levels ofincome and social welfare obtained in the differentsteady-state equilibria. Finally, Section 7 concludesand discusses some policy proposals.

2 The model

We consider overlapping generations of individualsthat live two periods. During the first period, eachindividual is socialized in some cultural traits and, atthe beginning of the second period, as an adult, hebecomes active and enters the labor market.

A proportion q ∈ [0, 1] of the individuals are ofentrepreneurial type (E), and the rest, (1 − q) ∈[0, 1], are of non-entrepreneurial type (N). The non-entrepreneurs work as civil servants or in a traditionalsector with a fixed payoff. The civil servants are a pro-portion α of the population and, therefore, α ∈ (0, 1)denotes the size of the administration.

2.1 Payoffs

The workers that join the traditional sector willreceive a fixed monetary payoff denoted by R >

0. However, entrepreneurship is a risky activity. Theincome is H > R in case of success and zero in case

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of failure. If the entrepreneur fails, his payoff is lowerthat the wage in a routine production activity R.

The success of the entrepreneurial activity dependson the legal and normative framework where thisactivity is conducted, and the institutional environ-ment depends on the efficiency of the administration,denoted by e. o We consider that the administrationefficiency e crucially affects the probability of suc-cess denoted by p and for the activity to be riskyindeed; this probability of success p has to be lowerthan 1. Additionally, there is some interaction betweenthe level of efficiency and the size of the administra-tion. We assume that the success of the entrepreneurialactivity depends both on the efficiency and the sizeof the administration, with an inverted-U relation-ship. Thus, very small or very big administrations willlead to lower probabilities of success.8 Summariz-ing, we assume that the probability of success of theentrepreneurial activity is given by the following:

p = eα(1 − α).

Therefore, the expected income π of the risky activ-ity is π = pH , where H can be interpreted as theproductivity of the entrepreneurial sector. Moreover,entrepreneurs pay taxes, τ , so that the net monetaryincome of an entrepreneur is as follows:

yE = (1 − τ)Hp. (1)

Collected taxes fund the public administration. Weconsider that only entrepreneurs pay taxes. It could beconsidered that all workers pay taxes and receive ser-vices in return but, in any case, there would be netcontributors and net beneficiaries. Under our assump-tion, the entrepreneurs are net contributors. Moreover,the tax rate is decided by majority, through a votingprocess.

We consider that the public administration is run bya single entity, and we assume that its managers decideon the level of efficiency and size of the administration(e, α) with the objective of maximizing the income ofcivil servants or bureaucrats. There is no agency prob-lem within the administration, whoever holds poweron behalf of the bureaucracy cares about the averagewelfare of the group as a whole. The level of efficiency

8Even if the administration is efficient, if civil servants are veryfew the support given to the entrepreneurs activity is likely toremain limited. Similarly, an oversized public sector would notcontribute to the success of entrepreneurial activity.

can be achieved at a cost which increases in the size ofthe administration, that is, the number of civil servantsα. In particular, it has a cost given by c(e) = α

βe2

2 ,

∀e ∈ [0, 1). Therefore, the managers of the adminis-tration choose the level of efficiency e and the size ofthe administration α that maximize the following:

τHqeα(1 − α) − αβe2

2(2)

which is the difference between public income and thecost to implement the regulatory framework. For sim-plicity, we assume that the collected taxes minus thecost of efficiency is divided equally among the civilservants. Therefore, officials’ wage is given by thefollowing:

yC = τHqe(1 − α) − βe2

2.

Civil servants’ wages increase with three factors: (i)the level of taxes, τ , (ii) the level of expected profitswhich, in turn, depends on the administration effi-ciency e, and (iii) the proportion of entrepreneurs q

. If there is a high proportion q of entrepreneurs, theproportion of taxpayers will increase. However, if thesize of the administration α increases, the number ofrecipients also increases: each civil servant receives asmaller fraction of the collected taxes.

We abstract from the free-riding problem of civilservants effort and consider that there is a minimumobservable effort that is enforceable and that if it isnot met by the civil servant, he will be fired. Then,the public agency offers an enforceable contract inwhich a wage level yC is specified, along with a min-imum effort level. (See Delfgaauw and Dur, 2008,or Forquesato, 2016, for an analysis on the incen-tives and workers’ motivation in the public sector ororganizations).

Finally, the monetary payoff of an on-entreprepreneurial individual is given by the following:

yN = α

1 − qyC +

(1 − α

1 − q

)R (3)

where yC and R are the payoffs as civil servantsand routine producers, respectively; and the fractions

α1−q

and 1 − α1−q

are the probabilities of a non-entrepreneurial individual to work as civil servant orroutine producer, respectively, when (1 − q) > α. If(1 − q) ≤ α, the probability of a non-entrepreneurial

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individual to work as civil servant will be one and,therefore yN = yC.

2.2 Preferences

Entrepreneurs positively value the participation ina risky activity and obtain a psychological pay-off denoted by γ > 0. This non-pecuniary bene-fit may correspond to social status, the satisfactionof starting your own business, the flexibility andautonomy of self-employment, etc. Moskovitz andVissing-Jorgensen (2002) estimate that entrepreneursnon-pecuniary benefits amount on average to some150% of the entrepreneur’s annual income. The non-entrepreneurial individuals, in contrast, obtain a psy-chological disutility γ > 0 from undertaking a riskyactivity. This type of individuals has a negative viewof things, such as taking risks, not having a permanentjob, etc.9

We use a simple kind of preferences to characterizethe types E and N. In particular, we consider that theindividuals have a linear utility function that dependson both the expected monetary payoff and on the non-pecuniary benefit they obtain for their activity:

UE = yE + γ 1E, (4)

UN = yN − γ 1E (5)

where yi, i ∈ {E, N}, denotes the expected mon-etary payoff and 1E is the indicator function ofentrepreneurial activity (1E = 0 if the individual istype N and 1E = 1 if he is type E).

A priori, both types could choose to carry out eitherthe risky or the non-risky activity. However, takinginto account the evidence about the intergenerationaltransmission of entrepreneurship, we consider that theindividual’s type determines the activity he chooses.

Wemake an assumption on the relationship betweenthe wage in the traditional sector R and the psycho-logical payoff γ of entrepreneurship. In particular, weestablish a lower bound on this psychological payoff:

(1 − α)R < γ Assumption 1

9We assume that the two psychological payoffs are the same.That is, the utility of engaging in the risky activity for theentrepreneurs is the same as the disutility of this activity for thenon-entrepreneurs. Although this assumption is not strictly nec-essary, it simplifies the process of obtaining and interpreting theresults.

Assumption 1 implies that we will not consider inour analysis the less interesting case where the psy-chological payoff from entrepreneurship is so lowcompared with the payoff in the traditional sector thatparents will always prefer that their offspring becomenon-entrepreneurs under any circumstance.

2.3 The game between administration and voters

The timing of each generation’s game is as follows.First, taxes are decided by majority voting, that is,individuals vote for the level of taxes τ ∈ [0, 1]that will fund the administration. After voting, theadministration decides about efficiency and size of theadministration. Then, the entrepreneurial individualsstart their business and the non-entrepreneurial indi-viduals find a job in either the public or the traditionalsector. Finally, all agents receive the payoffs.

There is a strategic interaction between the admin-istration and entrepreneurs. The administration needsthe success of the entrepreneurs to guarantee the pub-lic income and, obviously, the salary of the officials.And in turn, entrepreneurs need the efficiency of theadministration to be successful in their activity.

3 Equilibria in each generation

In this section, we analyze the equilibrium of thegame played in each generation between administra-tion and voters. Firstly, we obtain both the level ofefficiency and size of the administration given any taxrate decided by the voters and, secondly, we analyzethe tax rate that each type will vote anticipating theseadministration decisions.

The administration chooses the level of efficiency andsize of the public sector (e, α) that ensures the maxi-mum total payoff of the bureaucracy. Maximizing (2)with respect to e and α, subject to (1 − q) ≥ α, itfollows that the interior solution of each variable as a func-tion of the other variable, is given by the following:

e(α) = τqH(1 − α)

β,

α(e) = τ2qH − βe

4τHβ.

Notice that the smaller the size of administration,the higher is the level of efficiency chosen by itsmanager and vice versa.

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Solving for the optimal levels (e∗, α∗) , we obtainthat for 1 − q ≥ 1/3,

e∗ = τ2qH

3β, (6)

α∗ = 1

3. (7)

In the case that 1−q < 1/3, then all non-entrepreneurs

work as civil servants: α∗ = 1 − q and e∗ = τq2Hβ

.Therefore, there exists an optimal size of the

administration, while its efficiency increases (i) withthe tax rate τ , since bureaucrats acquire a higher pro-portion of the entrepreneurs’ profits, (ii) with the pro-portion entrepreneurs q (because they are tax payers)and, finally (iii) with the productivity H .

Second, we analyze the results of the voting processon taxes. Entrepreneurs face a trade off: high taxesmean that they appropriate a low proportion of theirincome but high taxes also improve the efficiency ofthe administration, and then increase the probability ofsuccess of the entrepreneurial activity. Consequently,even if they do not appropriate all the benefits ofthe risky activity, they vote for an intermediate taxrate. Nonetheless, the earnings of non-entrepreneursdepend positively on taxes, since a share of thosenon-entrepreneurs are civil servants. Consequently,non-entrepreneurs prefer a higher tax compared toentrepreneurs.

Formally, each type votes the tax rate that maxi-mizes his payoff, anticipating the efficiency chosen bythe bureaucracy. Entrepreneurs choose the tax rate thatmaximizes

yE = (1 − τ)π ={

τ(1 − τ)4qH 2

27β if q ≤ 2/3,

τ (1 − τ)H 2q3(1−q)

βif q > 2/3.

These payoff functions have a maximum in τ = 1/2.On the other hand, the non-entrepreneurs vote for thetax rate τ ∈ [0, 1], which maximizes their expectedpayoff

yN ={

α∗(1−q)

yC + (1 − α∗(1−q)

)R = 2τ 2H 2q2

9β + 2−3q3(1−q)

R if q ≤ 2/3,

yC = τ 2q4H 2

2β if q > 2/3.

These payoffs are increasing with τ and, conse-quently, the non-entrepreneurs vote for τ = 1. As itcan be expected, the non-entrepreneur individuals votefor the maximum level of taxes, that is, confiscatorytaxes.

The main result of this section is stated below anddescribed formally in the Appendix.

Proposition 1 There are two possible equilibria ineach generation depending on which of the two typesis prevalent in the population, (i) an entrepreneurialequilibrium if entrepreneurs are majority (q ≥ 1/2)with a low tax rate τ = 1/2 and (ii) a traditional equi-librium if non-entrepreneurs are majority (q < 1/2)with a high tax rate τ = 1.

Proof See Appendix.

If non-entrepreneurs are the majority of the pop-ulation, they win the voting process and taxes willbe confiscatory. In this case, bureaucracy appropriatesthe whole entrepreneurs’ earnings and entrepreneursobtain only their psychological payoff. Conversely, ifentrepreneurs are the majority of the population, theywill vote for an intermediate tax rate and the monetaryprofits from entrepreneurship will be shared betweenentrepreneurs and the bureaucracy.

4 Cultural transmission process

As obtained in the previous section the equilibriumplayed by each generation is fully determined by theexisting distribution of preferences in the population.But this distribution might change over time becauseof a process of intergenerational cultural transmissionof preferences. Having established the payoff of indi-viduals with different preferences in the equilibria,parents face the problem of choosing to transmit hiscultural trait (preferences for entrepreneurship or not)to his offspring.

4.1 The socialization process and the dynamicsof preferences for entrepreneurship

We draw from the model of cultural transmission byBisin and Verdier (2001), which is the economic ver-sion of the anthropological model by Cavalli-Sforzaand Feldman (1981). The type of an individual (i.e.,entrepreneur or not) will be an acquired trait derivedfrom the socialization process. Individuals will livethrough two periods: as children and as adults. Duringtheir childhood, each individual’s preference is shapedby both his parents and society at large. As an adult,

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he enters the labor market and becomes part of theproductive economy in his generation’s game.

Each adult has one child in the second period ofhis life and tries to transmit the values or preferencesthat he believes are the most valuable. Therefore, eachadult makes a decision on a costly socialization effortto influence his child’s preferences.

Let dit ∈ [0, 1) be the socialization effort made by

a parent of type i at generation t, i ∈ {E, N}. Social-ization occurs in two steps. A child is first directlyexposed to the parent’s preferences and is social-ized to these preferences with probability di

t (verticaltransmission). If this direct socialization is not suc-cessful, with probability 1 − di

t , she is socialized tothe preferences of a role model picked at random inthe population (oblique transmission). The transitionprobabilities P

ijt that a parent of type i will have a

child of type j , if the proportion of entrepreneurs is qt ,are given by the set of equations:

P EEt = dE

t + (1 − dEt )qt

P ENt = (1 − dE

t )(1 − qt )

PNNt = dN

t + (1 − dNt )(1 − qt )

PNEt = (1 − dN

t )qt . (8)

For instance, P EEt is the probability that a child of

an entrepreneur parent is socialized to entrepreneurialpreferences. Namely, with probability dE

t , he adoptshis parent preferences and with probability (1 − dE

t )

he adopts these preferences of other entrepreneurialindividual with whom he is randomly matched.

Given the transition probabilities Pijt , the propor-

tion qt+1 of entrepreneurs in periodt + 1 is describedin equation (9) and the dynamic evolution of thedistribution of preferences is given by (10):

qt+1 = qt + qt (1 − qt )(dEt − dN

t ), (9)

�qt = qt (1 − qt )(dEt − dN

t ). (10)

Notice that the proportion of entrepreneurs willincrease from one generation to another if, and onlyif, the socializing effort of the entrepreneur par-ents is greater than that of the non-entrepreneurparents (equation 11). Likewise, the proportion ofentrepreneurs will fall if, and only if, the socializing

effort of the entrepreneur parents is lower than that ofthe non-entrepreneur parents (equation 12).

�qt > 0 ⇐⇒ dEt − dN

t > 0 (11)

�qt < 0 ⇐⇒ dEt − dN

t < 0 (12)

4.2 The socialization effort choice of parents

Parents are imperfect altruists towards their chil-dren, according to the notion of “imperfect empathy”described by Bisin and Verdier (2001). That is, theyare concerned about their children’s welfare, but theyevaluate the utility that their children will receivethrough the lens of their own preferences. We denoteV ij the utility a type i parent assigns to a child of typej . This utility will depend on the expectation about thedistribution of preferences in the next generation. Wewill assume that parents have adaptive or backward-looking expectations, believing that the proportion ofentrepreneurs will be the same in the next generationas in the current generation.

The socialization effort has a cost: parents haveto invest in their children’s education, spend timewith them, choose the appropriate neighborhood, orschool, etc. For simplicity, we consider that the cost is

quadratic c(dit ) = k(di

t )2

2 , with k > 0, even though theresults are qualitatively identical with any increasingconvex function. Parents of type i choose the social-ization effort di

t at generation t that maximizes thefollowing:

maxdit

{P iit V ii + P

ijt V ij − c(di

t )}. (13)

The optimal parents’ socialization efforts are asfollows:10

d∗Et = 1

k�V E(1 − qt ) (14)

d∗Nt = 1

k�V Nqt . (15)

As in the literature, we call �V i = V ii−V ij the valueof cultural assimilation. This value of cultural assim-ilation is the net gain from socializing your child toyour own preferences. Hence, the parents’ socializa-tion effort depends on two factors: (i) the probabilityof oblique transmission and (ii) the value that parents

10See Appendix for the proof.

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Cultural transmission and persistence of entrepreneurship

confer to have a child of their own type instead of theother type. Concerning the first one, optimal social-ization efforts vary according to the probability ofoblique transmission. That is, the more individuals ofa type there are in the society, the lower the effort theseparents invest in vertical socialization. Since obliquesocialization is not costly, the parents of the predomi-nant type can trust that their children will be socializedtoward their own type by other individuals in the soci-ety. This is a standard property of the Bisin and Verdier(2001) model of transmission of preferences.

With respect to the second factor, expressions (14and 15) show that the value of cultural assimilationinfluences the socializations efforts of parents. Thelevel of cultural assimilation for the different typesdepends on the fiscal regime, which is decided by themajority type in the population. These values of cul-tural assimilation are computed in the Appendix andare presented here to facilitate the explanation. In anon-entrepreneurial economy (qt < 1/2), where themajority of non-entrepreneurs vote for confiscatorytaxes τ = 1, the values are as follows:

�V E = γ − yN and �V N = γ + yN .

For instance, the value of cultural assimilation of anentrepreneur �V E in an economy with a majorityof non-entrepreneurs will be the difference betweenthe value of having a child with his own prefer-ences, γ and the value of having a child with non-entrepreneurial preferences, yN .

In an entrepreneurial economy (qt ≥ 1/2), wherethe majority of entrepreneurs vote for nonconfiscas-tory taxes τ = 1/2, the values of cultural assimilationare now given by the following:

�V E =γ +[yE−yN

]and �V N =γ −

[yE−yN

].

In these expressions, we can see that the value for aparent to transmit their own preferences depends cru-cially on the expected payoff for their children. Inthe next section, we explain in greater detail how thevalues of cultural assimilation favors the spread of aparticular trait.

In short, preferences for entrepreneurship evolveover time depending on the relative optimal effortof both types of parents. Likewise, these optimalefforts are determined by the expected payoffs asentrepreneurs or not entrepreneurs which, in turn, are

Proportion of

ENTREPRENEURS

qt

Administration

EFFICIENCY

et

Socialization process

CULTURE

dit

Proportion of

ENTREPRENEURS

qt+1

Voting process t

Fig. 1 The dynamical links between the Proportion ofentrepreneurs, administration efficiency and Socializationprocess

determined by taxes and administration efficiency. Aschematic illustration of the whole dynamic setting ispresented in Fig. 1.

The state variable of the dynamics is the proportionof entrepreneurs in the population, qt in period t . Thisproportion determines the tax rate decided throughthe voting process, which in turn, determines the col-lected taxes and the level of efficiency and size of theadministration. Efficiency and size of the administra-tion determine the probability of success of the riskyentrepreneurial activity. This probability of successtogether with the proportion of entrepreneurs qt andthe entrepreneurial productivity H , jointly determinethe monetary income obtained by both types in thepopulation: entrepreneurs and non-entrepreneurs. Thedifferent types’ revenues, together with the psycholog-ical payoff, determine the adults’ direct socializationincentives, since they affect the net gains for transmit-ting your own preferences. Finally, the effect of bothdirect transmission incentives and oblique transmis-sion of preferences, captured by the current distribu-tion of preferences qt , leads to the next generation’sproportion of entrepreneurs qt+1. In the next Section,the pattern of the distribution of preferences in thelong run is analyzed.

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5 Preferences for entrepreneurship in the long run

The force that drives the change of the distribution ofpreferences is the socialization effort of both types ofparents. Formally, the dynamics of the distribution ofpreferences is derived by substitution of the optimaleducation effort d∗E

t and d∗Nt , from (14) and (15), into

expression (10):

�qt = qt (1 − qt )(d∗Et − d∗N

t

). (16)

A long-run equilibrium (steady state of the dynam-ics) is a situation in which the proportion ofentrepreneurs remains constant over time, �qt = 0.This can occur for two reasons. First, in a trivial way,because the society is made of a single type (qt = 0 orqt = 1), although these solutions lack interest becausethey are not stable.11 Second, because the socializingefforts of the two types are balanced, d∗E

t − d∗Nt = 0.

As explained in the previous section, if the social-ization effort of entrepreneurial parents is greater(smaller) than the effort of non-entrepreneurial, theproportion of entrepreneurial individuals will increase(decrease) from one generation to another. However,if socialization efforts equals, i.e., d∗E

t − d∗Nt = 0,

the distribution of preferences among the populationremains stable.

Next, we characterize the long-run equilibria of thedynamics starting from a society with a majority ofnon-entrepreneurs or from a society with a majority ofentrepreneurs.

5.1 The long-run equilibrium of a non-entrepreneurialsociety

In a society with a majority of non-entrepreneurs,where this majority holds up all the profits fromentrepreneurship through confiscatory taxes andreceive them as civil servants’ income, the dynamicsconverges to a steady state equilibrium with a low pro-portion of entrepreneurs, which we call as a traditionalequilibrium. The superscript c is used for traditionalequilibrium.

Proposition 2 For all q0 < 1/2 the dynamics con-verges to a traditional equilibrium (qc < 1/2), with amajority of non-entrepreneurs and a tax rate τ = 1.

11This a property of this kind of dynamics, see Bisin andVerdier (2011b).

Proof See Appendix.

In a society with a majority of non-entrepreneurs,the value of cultural assimilation and thereforethe incentives for direct socialization are alwayshigher for non-entrepreneurs than for entrepreneurs.The intuition behind this result is quite obvi-ous: non-entrepreneurs hold up all the profits fromentrepreneurship through confiscatory taxes andreceive them as civil servants’ income.

Nevertheless, given assumption 1 ((1 − α)R < γ ),for low values of the level of entrepreneurship qt ,the income of civil servants will also be very lowand so will be the difference between the valuesof cultural assimilation of both types. On the otherhand, non-entrepreneurs trust on oblique transmis-sion and will exert a low socialization effort, whilethe minority of entrepreneurs will try to compensatethe effects of oblique transmission with an increasedsocialization effort. As a result, for low values of qt ,the optimal socialization effort of the entrepreneursdEt will be higher than the one of non-entrepreneurs

dNt , and the share of entrepreneurship preferences

will increase in the next generation. For the rest ofthe non-entrepreneurial region, oblique transmissionis not strong enough to compensate for the increas-ing difference on the values of cultural assimilation�V N − �V E. All the previous discussion explainsthe directional arrows on Fig 2 for qt < 1/2. In Fig. 2,we can see the direction of changes in the proportionof entrepreneurs for different values of qt . The arrowsshow the direction of intergenerational change.

5.2 The long-run equilibrium of an entrepreneurialsociety

In a society with a majority of entrepreneurs wherethey vote for intermediate taxes and thus share theprofits from entrepreneurship with civil servants, thedynamics converges either to (i) the entrepreneurialequilibrium, denoted by qe, with a relatively highproportion of entrepreneurs and a high administra-tion efficiency, if entrepreneurial productivity is highenough, or to (ii) the traditional equilibrium, qc, ifentrepreneurial productivity is low. Formally,

Proposition 3 1. For all q0 ≥ 1/2 and productiv-ity H < H ′ the dynamics converges to a traditional

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Cultural transmission and persistence of entrepreneurship

Fig. 2 The dynamics of theproportion of entrepreneurs

qt0,51

qe

t

qt0,51

qc

t

H < H

qc

equilibrium (qc < 1/2), with a majority of non-entrepreneurs and a tax rate τ = 1.

2. For all q0 ≥ 1/2 and productivity H ≥ H ′ thedynamics converges to an entrepreneurial equilibrium(qe > 1/2), with a majority of entrepreneurs and atax rate τ = 1/2.The critical value is H ′ = 6

√βR.

Proof See Appendix.

In a society with a majority of entrepreneursvoting for nonconfiscastory taxes τ = 1/2, therelationship between the values of cultural assim-ilation depend now on the difference in monetarypayoffs obtained between entrepreneurs and non-entrepreneurs. Namely, notice that �V E > �V N ifand only if yE > yN.

For low values of the proportion of entrepreneursqt , but higher than 1/2, the relation between yE andyN and the relative incentives for socialization dependon the level of entrepreneurial productivity H . Let usdenote as H ′ the value of H that equalizes yE and yN

when q = 1/2. Straightforward calculation yields thatH ′ = 6

√βR.

Therefore, when the productivity fromentrepreneurship is very low, H < H ′, the socializa-tion effort of non-entrepreneurs parents is higher thanthat of entrepreneur parents even when taxes are non-confiscatory. Preferences for non-entrepreneurshipspread in the population until eventually qt will fallbelow 1/2 and non-entrepreneurs will become the newmajority. In this case, there will be no steady-stateequilibrium where entrepreneurial preferences aremajority.

But for high enough levels of productivity, H

≥ H ′, and qt higher and close to 1/2, theincome obtained by entrepreneurs will be higherthan the income obtained by individuals of the non-entrepreneur type. Consequently, the socializationeffort of entrepreneurs will be higher than that ofnon-entrepreneurs, resulting in an increase in the nextgeneration’s proportion of entrepreneurs. Intuitively,only if the productivity of entrepreneurship H is suf-ficiently high, entrepreneur parents will have strongerincentives to socialize their children than the incen-tives non-entrepreneurial parents have.

However, once high values of qt are reached,the monetary payoff for a non-entrepreneur becomesgreater than the one obtained by an entrepreneur.The reason is that in an economy with high levelsof entrepreneurship, the few existing civil servantsshare half of the aggregate profits from entrepreneurialactivity, which are collected through taxes, obtain-ing very high wages. Moreover, for high values ofqt , oblique transmission also favors the spread ofnon-entrepreneurial preferences.

In Fig. 2, we can see the direction of changes in theproportion of entrepreneurs for different values of qt

and H .Summarizing, the results obtained in the two pre-

vious propositions show how the persistence of thelevels of entrepreneurship is determined by the initialproportion of entrepreneurs in the society and by theproductivity of the entrepreneurial sector. If the econ-omy starts with a low proportion q0 of entrepreneursin the population, or with an initial low level of pro-ductivity H (H < H ′), then it will get trapped in the

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long run in a traditional steady state equilibrium (qc).

The persistence of high levels of entrepreneurship inan economy can also be explained by our results.If entrepreneurs are the majority in the population(q0 > 1/2) and the productivity is sufficiently high,the economy will settle down in an entrepreneurialequilibrium.

5.3 The role of taxes

The deep determinants driving the convergence toone steady-state equilibrium or the other are thelevel of taxes and the level of productivity of theentrepreneurial sector. If the level of productivity H isvery low (H < H ′), then the society will get trappedin the long run in a traditional steady-state equilib-rium (qc). However, when productivity is sufficientlyhigh (H ≥ H ′), the introduction or not of confisca-tory taxes in some generation is driving the dynamics.More precisely, if confiscatory taxes are set by somegeneration and maintained over time, the economyconverges to the traditional steady state. Alternatively,if non-confiscatory taxes are implemented by all gen-erations along the trajectory of the dynamics, theeconomy converges to the entrepreneurial steady state.

Remark 1 The tax policy path implemented by allgenerations determines the convergence to a tradi-tional or entrepreneurial equilibrium.

In order to see the intuition, let us consider thatthe same tax policy is implemented for any distribu-tion of preferences in the population. For instance, ifconfiscatory taxes are set for any qt in all periods,the traditional equilibrium with qc < 1/2 becomesthe global attractor of the dynamics. That is, for anyinitial condition of the economy q0 the dynamicalsystem converges to the steady state qc. Similarly,for a permanent non-confiscatory tax policy (τ =1/2), the entrepreneurial equilibrium with qe > 1/2becomes the global attractor of the dynamics. Obvi-ously, an exogenous and permanent change in taxpolicy can move the economy from one steady stateto the other. For instance, suppose that an economyis trapped in a traditional equilibrium because of aconfiscatory tax policy. A permanent change to anon-confiscatory tax policy will drive the economyto an entrepreneurial equilibrium with high levels ofproductivity and entrepreneurship.

6 Comparison of the traditionaland entrepreneurial equilibria

In this Section, we compare the two steady states,focusing on the aggregate income of the economy,as well as the incomes obtained by entrepreneursand non-entrepreneurs. That is, we will analyze thesize and distribution of aggregate welfare. We useagain the superscript e to denote the characteristics ofthe entrepreneurial equilibrium, and the superscript c

stands to denote those of the traditional equilibrium.Let us assume that the psychological payoff fromentrepreneurship has an upper bound,

γ <H 2

81β+ 10

9R (Assumption 2)

Assumption 2 implies that we do not considerin our analysis the case where the psychologicalpayoff from entrepreneurship is so high that par-ents will always prefer that their offspring becomeentrepreneurs under any circumstance.

Proposition 4 Suppose that Assumption 2 holds,1. The administration is more efficient in theentrepreneurial equilibrium than in the traditionalequilibrium: ee > ec. 2. Civil servants’ payoff ishigher in the entrepreneurial equilibrium than in thetraditional equilibrium: ye

C > ycC.

3. Entrepreneurs’ payoff is higher in theentrepreneurial equilibrium than in the traditionalequilibriumA: ye

E > ycE .

Proof See Appendix.

Thus, in the entrepreneurial equilibrium, theAdministration is more efficient. Hence, the proba-bility of success of risky entrepreneurship is higherthan in the traditional equilibrium. In addition, pay-offs are higher both for entrepreneurs and for civilservants. Since in the traditional sector the payoff R isalways the same, per capita incomes are higher in theentrepreneurial equilibrium. The social welfare func-tion is given by the aggregation of the income obtained

by each type: qyE + (1 − q)(

13(1−q)

yC + 2−3q3(1−q)

R).

Therefore, it easily follows that social welfare ishigher in the entrepreneurial equilibrium. Given thechoice, both civil servants and entrepreneurs wouldprefer to be in an entrepreneurial equilibrium. ThusCorollary 1 follows from Proposition 4.

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Cultural transmission and persistence of entrepreneurship

Corollary 1 Social welfare is higher in the entreprene-urial equilibrium than in the traditional equilibrium.

If Assumption 2 does not hold, the incentives forsocialization of entrepreneurial parents, even in a soci-ety with a majority of non-entrepreneurs, would be sohigh that the traditional equilibrium would be charac-terized by a relatively high proportion of entrepreneurs(although in aminority) and, given the confiscatory taxes,the administrationmight showahighlevel of efficiency andobtain a high monetary income for the bureaucracy.

Another issue is the distribution of this welfare amongthe different types of individuals in each steady state.In the traditional equilibrium non-entrepreneurs willbe better off than entrepreneurs because they appro-priate all the profits generated by the entrepreneurialsector through confiscatory taxes. The opposite hap-pens in the entrepreneurial equilibrium.

Proposition 5 In the entrepreneurial equilibrium,entrepreneurs have a higher utility than non-entrepreneurs: Ue

E > UeN , and a higher monetary

payoff than civil servants, yeE > ye

C .

Proof See Appendix.

According to this proposition, entrepreneurs obtaina higher expected utility than non-entrepreneurs inthe entrepreneurial equilibrium. This result is inline with the theory of social legitimation (Etzioni1987), according to which economies with moreentrepreneurs create an environment that is morefavorable to entrepreneurship. Notice additionallythat, in the entrepreneurial equilibrium, civil servantshave a lower income than entrepreneurs.

7 Concluding remarks and discussion

This paper presents a theory that explains the persis-tence of differences between levels of entrepreneur-ship across countries or regions. Empirical evidenceshows that the ranking of countries by level ofentrepreneurship does not change over the years forlong periods of time (Freytag and Thurik 2007). Themain result of the study is that taxes on entrepreneurialprofits are crucial to lead an economy towards eitheran entrepreneurial or a traditional equilibrium. Thelevel of taxes, if decided by majority voting, depends

on the proportion of entrepreneurs among the popula-tion. Due to the interdependence and the intertemporalreinforcement among taxes, Administration perfor-mance, productivity, and transmission of preferences,the economy gets trapped close to the initial situation.

In an entrepreneurial equilibrium, there is a major-ity of entrepreneurs in the population. The distributionof preferences does not change because the socializa-tion efforts are equal for both types of individuals. Theentrepreneur majority implements a tax policy thatmaximizes their expected profits by giving the appro-priate incentives for efficiency to the public administra-tion. Thehighnet payoff obtainedby the entrepreneurialactivities provides strong incentives for cultural social-ization to entrepreneurship preferences. But in thissteady state, there are also equally strong incentives forsocialization to non-entrepreneur preferences, becausethe wage for civil servants (designed to sustain theirhigh level of efficiency) is very high. The high levelsof income obtained by entrepreneurs and civil servantsare sustained by a high efficiency of the bureaucracy.

In an traditional equilibrium, there is a majorityof non-entrepreneurs in the population. The non-entrepreneur majority implements a confiscatory taxpolicy. The socialization effort of entrepreneur par-ents and non-entrepreneur parents equalize in thissteady state thanks to both oblique cultural transmis-sion and the low income that can be obtained byroutine producers. Both factors provide incentives forsocialization effort to entrepreneurial preferences.

Social welfare is higher in an entrepreneurial equi-librium. In line with studies that link entrepreneur-ship to economic growth, both the efficiency of theentrepreneurial sector and the per capita income willbe higher in the entrepreneurial equilibrium than in thetraditional equilibrium.

Therefore, if individuals are forward-looking andare concerned about the welfare of future genera-tions, they will try to implement some tax reform inorder to drive the economy to an entrepreneurial equi-librium. Namely, a coalition between entrepreneursand civil servants could be formed to agree on a cred-ible commitment to never set confiscatory taxes in thefuture and to compensate the short-run losses for non-entrepreneurs with a subsidy. Obviously this intergen-erational and interclass coalition suffers from the usualtime-inconsistency problem. In other words, this com-mitment or promise is clearly non-credible. However,there are ways to establish credible commitments.

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For instance, constitutional limits on the tax rate pol-icy and on the civil servants future wages can beestablished. Alternatively, another way to build credi-bility is the integration in a supranational organization(international club), for instanc, the European Union,where confiscatory taxes are not permitted. For dif-ferent reasons, these mechanisms are very costly toreverse. In case of a constitutional reform, becauseit requires a qualified majority to do so. In case ofthe participation in an international club, because exitcan be very costly in terms of losing the tradingadvantages obtained from being a member of the club.

Another mechanism of commitment that operatesto guarantee the absence of confiscatory taxes is thedegree of external openness of the economy. Noticethat in our model a closed economy is implicitlyassumed. But if the economy is open (and in particular ifit belongs to a supranational economic region with freetrade and free movement of persons and capital), thenthere will be an obvious restriction on the behaviorof a non-entrepreneur majority that puts a limit ontax rates: talent and entrepreneurship can migrate toanother country. These possible extensions of our modelhighlight again the crucial role played by taxes on thefinal long-run equilibrium achieved by an economy.

Acknowledgments G. Olcina and L. Escriche acknowledgefinancial support from the Spanish Ministry of Economy and Com-petitiveness project, ECO-2014-58297-R, ECO-2017-87245-Rand the ERC project-TECTACOM. E.M. Tur thanks the BromanFoundation for financial support.

Open Access This article is distributed under the terms of theCreative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unre-stricted use, distribution, and reproduction in any medium,provided you give appropriate credit to the original author(s)and the source, provide a link to the Creative Commons license,and indicate if changes were made.

Appendix

The time subscript has been removed in the proofs

Proof of Proposition 1 The individuals of the major-ity win the vote on taxes. The manager of the adminis-tration decides on the level efficiency and the size ofthe administration (e, α) with the objective of maxi-mizing the total payoff of the bureaucracy: τHqeα(1−α) − α

βe2

2 , subject to (1 − q) ≥ α. Let us denote this

function as f = τHqeα(1−α)−αβe2

2 . The first-orderconditions for an interior solution are follows:

fe = 0 → τqH(1 − α∗)α∗ − α∗βe∗ = 0 → e∗ = τ

qH(1−α∗)β

,

fα = 0 → τqHe(1 − 2α∗) − βe∗

2= 0 → α∗ = τ2qH−βe∗

4τHβ.

Solving for the optimal levels (e∗, α∗), we obtainthe following:

e∗(τ ) = τ2qH

3β, (17)

α∗ = 1

3. (18)

And, it is easy to check that it is a maximum since:fee = −αβ < 0, fαα = −2τHqe∗ < 0. Furthermore,fee × fαα > (feα)2 since

2α∗βτHqe∗ >(τHq − 2τHqα∗ − βe∗)2

→ 8

9(τHq)2 >

5

9(τHq)2 .

If 1 − q < 1/3, then the maximum is in the boundaryof the set of feasible solutions, α∗ = 1 − q and the

effort level is e∗(τ ) = τqH 2

β. Substituting the tax rate

(τ = 1 or τ = 1/2), we obtain the administrationefficiency in each case. The payoffs for both types ofagents are determined by equations (1) and (3). Thereare two possible equilibria within a generation:

1. Equilibrium if non-entrepreneurs are the majority,q < 1/2, characterized by the following:

τ = 1,

e = 2qH

3β,

yC = 2q2H 2

9β,

yE = 0.

2. Equilibrium if entrepreneurs are the majority, q ≥1/2, characterized by the following:

τ = 1/2,

e ={

qH3β if q ≤ 2/3

qH 2

2β if q > 2/3,

yC ={

q2H 2

18β if q ≤ 2/3q4H 2

8β if q > 2/3,

yE ={

qH 2

27β if q ≤ 2/3q3(1−q)H 2

4β if q > 2/3.

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Cultural transmission and persistence of entrepreneurship

Proof of the optimal socialization effort choiceof parents (subsection 4.2)

Parents of type i choose the socialization effort dit at

generation t that maximizes the following:

maxdit

{P iit V ii + P

ijt V ij − c(di

t )}.

The first order condition is as follows :

∂P iit

∂dit

V ii + ∂Pijt

∂dit

V ij = kdit .

In order to guarantee dit ∈ [0, 1), a sufficient condi-

tion is k > max{�V E, �V N }, i.e., the marginal costof effort 1 is greater than the value of cultural assim-ilation. In that case, the marginal cost for parents toensure that their child acquires the same preferencesas their own is too high.

Differentiating the transition probabilities in Eq. 8and substituting in the first order condition, we obtainthe parents’ socialization efforts as follows:

d∗Et = 1

k

(V EE − V EN

)(1 − qt )

d∗Nt = 1

k

(V NN − V NE

)qt .

Hereafter, to simplify the notation, we do notinclude this auxiliary parameter k, although it shouldbe remembered that it is implicit in the formulas.When dE

t − dNt is written, one should actually read

k(dEt − dN

t

).

Proof of Proposition 2: Equilibrium in the long runwhen non-entrepreneurs are majority.

In a non-entrepreneurial economy (q < 1/2), wherethe majority of non-entrepreneurs vote for confisca-tory taxes τ = 1, the values of cultural assimilationare follows:

�V E = γ −yN →�V E = γ −[αyC + (1 − α)R

]

�V N = γ +yN →�V N = γ +[αyC + (1 − α)R

].

The difference between the socialization efforts ofthe two types of parents is as follows:

dE − dN = (1 − q)�V E − q�V N

= �V E − q(�V E + �V N

)=

= γ (1 − 2q) − yN .

If q < 1/2, the payoffs are yC = 2q2H 2

9αβ, yE = 0 (see

proof of Proposition 1), therefore

dE−dN = γ (1−2q)−[

2q2H 2

27(1 − q)β+ 2 − 3q

3(1 − q)R

].

We have to prove that qc effectively exists and that isunique. If q < 1/2, we have the following:

dE−dN =− q2H 2

2(1 − q)2αβ− 2 − 3q

3(1 − q)R

︸ ︷︷ ︸<0

+ γ (1−2q)︸ ︷︷ ︸>0

and substituting for q = 1/2 and q = 0, the differencebetween socialization efforts results:

dE − dN∣∣∣q=1/2

= −2H 2

54β− 5

6R < 0

dE − dN∣∣∣q=0

= γ − 2

3R > 0 under Assumption 1

As dE −dN is continuous in [0, 1/2], ∃qc ∈ (0, 1/2) :dE − dN = 0, and therefore at this point �qt = 0.

In addition,∂(dE−dN

)∂q

= − 2H 2

27β2(1−q)(1−q)2 − 2γ −

R

3(1−q)2 < 0, ∀qc ∈ [0, 1/2], therefore dE − dN isdecreasing in [0, 1/2]. Therefore, this qc ∈ (0, 1/2) isunique.

Proof of Proposition 2: Equilibrium in the long runwhen entrepreneurs are majority, q ≥ 1/2.

In an entrepreneurial economy (q ≥ 1/2) where themajority of entrepreneurs vote for non-confiscastorytaxes τ = 1/2. The values of cultural assimilation ifqt < 2/3 are now given by the following:

�V E = γ +[yE − yN

]→ �V E

= γ −(1 − 1

3(1 − q)

)R +

[yE − 1

3(1 − q)yC

],

�V N = γ −[yE − yN

]→ �V N

= γ +(1 − 1

3(1 − q)

)R −

[yE − 1

3(1 − q)yC

].

The differences between socialization effort, consid-ering (14) and (15) are follows:

dE − dN = (1 − q)�V E − q�V N

= �V E − q(�V E + �V N

)

= yE − 1

3(1 − q)yC −

(1 − 1

3(1 − q)

)R

+γ (1 − 2q).

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If q > 2/3 then (1 − q) < α∗ = 1/3 and all non-entrepreneurs become civil servants and yN = yC .Therefore,

dE − dN = γ (1 − 2q) + q3H 2

8β(2 − 3q) ,

which is negative for all q > 2/3.However, if q < 2/3 then

dE − dN = qH 2

27β− 1

3(1 − q)

q2H 2

18β

−(

2 − 3q

3(1 − q)

)R + γ (1 − 2q)

= 2 − 3q

54(1 − q)βqH 2 − 2 − 3q

3(1 − q)R + γ (1 − 2q)

We have to prove that qe effectively exists and that isunique. We have that the first term is positive and thesecond is negative if q < 2/3.

dE − dN = 2 − 3q

54(1 − q)βqH 2

︸ ︷︷ ︸>0

− 2 − 3q

3(1 − q)R+γ (1 − 2q)

︸ ︷︷ ︸<0

Substituting for q = 1/2 and q = 2/3 in thisexpression, we have the following:

dE − dN∣∣∣q=1/2

= −1

3

(R − H 2

36β

)

> 0 ifH ≥ H ′,whereH ′ = 6√

βR

dE − dN∣∣∣q=2/3

= −1

3γ < 0.

As dE − dN is continuous in [1/2, 2/3], ∃qe ∈(1/2, 2/3): dE − dN = 0, and therefore at this point�qt = 0.

In addition,∂(dE−dN

)∂q

= − 2γ + R

3(1−q)2+

H 2

54β3q2−6q+2

(1−q)2< 0 ∀q ∈ [1/2, 2/3], taking into

account that 23R < γ and that H ≥ H ′ = 6

√βR;

therefore, dE −dN is decreasing in [1/2, 2/3]. Hence,this qe ∈ (1/2, 2/3) is unique.

Nonetheless, if H < H ′, the differences betweensocialization efforts (dE − dN) is negative ∀qt ∈[1/2, 1] and non-entrepreneurial traits spreads amongthe population. Eventually, the proportion qt will ariseto qt < 1/2 and the economy converges to qc asproved in Proposition 2.

Proof of Proposition 4 Comparison of the traditionaland entrepreneurial equilibria

Table 1 Efficiency and payoffs at the steady state equilibria

Traditional equilibrium Entrepreneurial equilibrium

ec = 2qcH3β ee = qeH

3β

ycC = 2(qc)2H 2

9β yeC = (qe)2H 2

18β

ycE = 0 ye

E = qeH 2

27β

Taking into account the steady state points qc

and qe from Propositions 2 and 3, we calculate theadministration efficiency, civil servants’ payoff, andentrepreneurs’ payoff in each equilibrium. Table 1provides the results to facilitate the comparison

1. Comparing administration efficiency, we havethat ee > ec if qeH

3β >2qcH3β → qe > 2qc. We

know that 1/2 < qe < 2/3 and qc < 1/2. There-fore, it must hold that 1/2 > 2qc. A sufficientcondition is qc < 1/4. If dE − dN

∣∣q=1/4 < 0,

then qc < 1/4. The difference between social-ization efforts for q < 1/2 is given by thefollowing:

dE −dN = − 2q2H 2

27β(1 − q)− 2 − 3q

3(1 − q)R+γ (1 − 2q)

and evaluated in q = 1/4 is

dE − dN∣∣∣q=1/4

= − H 2

162β− 5/9R + 1/2γ.

Recall that for H < H ′, there is only a steadystate qc. Therefore, we analyze the case whereH ≥ H ′. Substituting forH ′ = 6

√βR,we obtain

that under Assumption 2, for any H ≥ H ′ →dE − dN

∣∣q=1/4 < 0, which implies that ee > ec.

2. Civil servants’ payoff is higher in theentrepreneurial economy than in the traditional

economy: yeC > yc

C if (qe)2H 2

18β >(qc)2H 2

9β → qe >

2qc, which holds if ee > ec that has been provedabove.

3. It is trivial because ycE = 0

Proof of Proposition 5 First, we compare the utilitiesUe

E and UeN :

UeE = qeH 2

27β+ γ

UeN = (qe)2 H 2

54(1 − qe)β+ 2 − 3qe

3(1 − qe)R.

170

Cultural transmission and persistence of entrepreneurship

Comparing the first terms, we obtain that qeH 2

27β >

(qe)2H 2

54(1−qe)2βif qe < 2

3 which holds because qe ∈(1/2, 2/3). Moreover, γ >

2−3qe

3(1−qe)R ∀qe ∈

(1/2, 2/3) as γ > 23R because of Assumption 1, then

UeE > Ue

N .Second, we compare ye

E with yeC . The payoff of

entrepreneurs is higher than the payoff of a civil ser-

vant if qeH 2

27β >(qe)2H 2

18β → qe < 2/3 which holdsbecause qe ∈ (1/2, 2/3).

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