Institutions, education, and development: The role of entrepreneurs

Entrepreneurs are instrumental for structural transformation. They create and organize new firms and hire workers with a minimum level of human capital. Entrepreneurs encourage workers to invest in their own education in order to move into the modern production sector. Better institutions lead to less income diversion, which creates a greater supply of entrepreneurs, a larger demand for human capital, and faster structural transformation. Education policy alone is not as effective, although it, too, raises the number of entrepreneurs. Simulations and evidence from Brazilian states support the theory.