BPEA | Fall 2011

What Do Small Businesses Do?

Benjamin Wild Pugsley and
Ben Puglsey
Benjamin Wild Pugsley Robert and Irene Bozzone Associate Professor of Economics - University of Notre Dame
Erik Hurst
Erik Hurst
Erik Hurst Frank P. and Marianne R. Diassi Distinguished Service Professor of Economics - Booth School of Business, University of Chicago, Deputy Director - Becker Friedman Institute

Fall 2011

We show that most small business owners are very different
from the entrepreneurs that economic models and policymakers often have
in mind. Using new data that sample entrepreneurs just before they start their
businesses, we show that few small businesses intend to bring a new idea to
market or to enter an unserved market. Instead, most intend to provide an existing
service to an existing market. Further, we find that most small businesses
have little desire to grow big or to innovate in any observable way. We show
that such behavior is consistent with the industry characteristics of the majority
of small businesses, which are concentrated among skilled craftspeople,
lawyers, real estate agents, health care providers, small shopkeepers, and restaurateurs.
Lastly, we show that nonpecuniary benefits (being one’s own boss,
having flexibility of hours, and the like) play a first-order role in the business
formation decision. Our findings suggest that the importance of entrepreneurial
talent, entrepreneurial luck, and financial frictions in explaining the firm size
distribution may be overstated. We conclude by discussing the potential policy
implications of our findings.