Modelling Entrepreneurship: Unifying The Equilibrium and Entry/Exit Approach

Two approaches can be distinguished with respect to modelling entrepreneurship: (i) the approach focusing on the net development of the number of entrepreneurs in an equilibrium framework and (ii) the approach focusing on the entries and exits of entrepreneurs. In this paper we unify these approaches to arrive at a model explaining the equilibrium and actual number of entrepreneurs and the entry and exit rate of entrepreneurs simultaneously and consistently. We apply our unified approach to the Netherlands using self-employment data for the 1960–1999 period. We find error-correction of about 20% per year and a very different situation in terms of disequilibrium before and after the early 1980s. Periods of high unemployment appear to be characterized by both high entry and high exit rates.