| Abstract: | This paper defines entrepreneurship as firms' activities to predict and adapt to changes in the environment, and derives an aggregate production function as a result of entrepreneurship. An increase in firms' prediction ability improves allocative efficiency in a competitive economy, but can reduce it when opportunities are distorted. It is shown that prediction ability can aggravate distortions in the presence of political risk. Because efficiency affects the total factor productivity of an economy, the model can explain how entrepreneurship influences total factor productivity. |
