BillionairesTinoSanandajiyPeterT.LeesonzJanuary2,2012AbstractExisting - PDF document

BillionairesTinoSanandajiyPeterT.LeesonzJanuary2,2012AbstractExistingstudiesofentrepreneurshipfocusonentrepreneurswhoseindividualcon-tributiontowealthcreationistypicallytrivial:self-employedpersons.Thispaperin-vestigatesentrepreneurswhoseindividualcontributiontowealthcreationisenormous:billionaires.Weexploretherelationshipbetweeneconomicdevelopment,institutions,andthesecontrastingkindsofentrepreneurs.We…ndthattheinstitutionsconsis-tentwithself-employedentrepreneursdi¤ermarkedlyfromtheonesconsistentwithbillionaires.Further,onlythelatterareconsistentwiththeinstitutionsthatunder-lieeconomicprosperity.Wherewell-protectedprivatepropertyrightsandsupporting,market-enhancinginstitutions‡ourish,sodobillionaires.Butself-employedentrepre-neursdon’t.Whereprivatepropertyrightsareweaklyprotectedandinterventionistinstitutions‡ourish,sodoself-employedentrepreneurs.Butbillionairesdon’t.JELcodes:L26,O17,N2,H2,L53.Keywords:Billionaires;entrepreneurship;self-employment;institutions. Wegratefullyacknowledge…nancialsupportfromtheTorstenandRagnarSöderbergFoundation.WealsothankPeteBoettke,ChrisCoyne,andparticipantsoftheJune2011IFN/SwedishEntrepreneurshipForumConferenceEntrepreneurship,IndustrialDevelopmentandGrowthforhelpfulcommentsandsugges-tions.SanandajialsothankstheJanWallanderandTomHedeliusFoundationfor…nancialsupport.yEmail:Tino@UChicago.edu.Address:HarrisSchoolofPublicPolicyStudies,UniversityofChicago,1155E.60thSt,Chicago,IL60637,USAandResearchInstituteofIndustrialEconomics,Box55665,SE-10215,Stockholm,Sweden.zEmail:PLeeson@GMU.edu.Address:GeorgeMasonUniversity,DepartmentofEconomics,MS3G4,Fairfax,VA22030,USA.1 1IntroductionAtinynumberoftheworld’sentrepreneursproduceanenormousamountoftheworld’swealth.Theseentrepreneursarebillionaires:entrepreneurswhomadeabilliondollarsormorefoundingandgrowingnewbusinesses.1Billionaires’networthre‡ectstheirbusinesses’pro…tsandcapitalgains.Inwell-functioningmarketeconomiesitmeasuresthetotalsocialvaluebillionaireshavecontributedtotheworld.Thatcontributionisastonishing.ConsidertheUnitedStates.In2009therewere234billionairesintheUnitedStatesworth$718billioncollectively.2America’sbillionairescom-prisedlessthan0.00008percentofitspopulation.Buttheycontributedmorethan1.3percentofitswealth.Comparebillionaires’contributiontowealthtoself-employedentrepreneurs’contribu-tion.In2009America’sself-employedentrepreneurswerecollectivelyworthnearly28timeswhatitsbillionaireswereworth(FederalReserve2011).3Buttheyweremorethan61,000timesasnumerous(Hipple2010).4Themedianself-employedentrepreneur’scontributiontowealthwasjustover$365,000(Brickeretal.2011).Themedianbillionaireentrepreneur’scontributionwasmorethan4,600timeslarger.Clearlyallentrepreneursaren’tcreatedequal.Thevastmajoritycontributealmostnoth-ingtoglobalprosperity.Anelite,super-richfewcontributetoglobalprosperityinremarkabledisproportiontotheirnumber.Existingstudiesofentrepreneurshipfocusonentrepreneurswhoseindividualcontributiontowealthcreationistypicallytrivial:self-employmentpersons(see,forinstance,EvansandJovanovic1989;EvansandLeighton1989;Blanch‡owerandOswald1998;Fairlie1999;GentryandHubbard2000;Hamilton2000;BruceandSchutze2004;Lazear2004;Bitler 1Notallbillionairesmadetheirfortunesthisway.Aswedescribebelow,thispaperconsidersthosewhodid.2Nordhaus(2004)estimatesthatAmericanentrepreneursonlycaptureasmallshareofthesocialvaluetheycreateasprivatewealth.Thissuggeststhatsomebillionairesmayhavecreatedtensorevenhundredsofbillionsdollarsofsocialvaluethroughtheirentrepreneurship.3This…gureisbasedonanestimateofhousehold’snetworthwhoseheadofhouseholdisself-employed.Itprovidesonlyacrudeideaofself-employedentrepreneurs’networth.Estimatingtheearningsandnetworthofself-employedpersonsisnotoriouslydi¢cultduetoincomeunder-reportingandtheproblemofseparatingcapitalearningsfromlaborearnings.See,HenreksonandSanandaji(2011).4This…gureisbasedonanestimateofthenumberofincorporatedandunincorporated,non-agriculturalself-employedpersonsintheUnitedStates,whichincludesthepart-timeself-employed.2 etal.2005;Guisoetal.2006;CagettiandDeNardi2009).5Thispaperinvestigatesentrepreneurswhoseindividualcontributiontowealthisenormous:billionaires.Weexploretherelationshipbetweeneconomicdevelopment,institutions,andthesecontrastingkindsofentrepreneurs.Ourpaperisthe…rsttostudybillionaireentrepreneurs.However,previousworkattemptstodistinguish“high-impactentrepreneurship”fromitslow-impact,self-employedcounter-part.Oneapproachconsidersfaster-growing…rms(forasurveyofthiswork,seeHenreksonandJohansson2010).AnotherapproachusestheGlobalEntrepreneurshipMonitor’s(GEM)“high-growthentrepreneurship”variable,whichmeasuresthefrequencyof…rmownerswhoemploy20ormorepersons.6Forexample,Autio(2005,2007),BowenandDeClercq(2008),andEstrin,Korosteleva,andMickiewicz(2009)considerhowinstitutionsandpoliciesarerelatedto“high-growth”versuslow-impactentrepreneurialactivity.7Ourapproachprovidesanalternativelookat“high-impact”entrepreneurialactivity.WedevelopanewmeasureofthatactivitybasedonForbesMagazine’slistof“TheWorld’sBil-lionaires.”Inconsideringbillionaires,ourapproachfocusesontheaspectofentrepreneurshipthatresearchersandpolicymakerspresumablycareaboutmost:wealthcreation.Theresultsofourempiricalanalysisaresimplebutstriking.First,self-employeden-trepreneursareassociatedwithpoverty,notwealth.Incontrast,billionairesareassociatedwithwealthratherthanpoverty.Second,theinstitutionsconsistentwithself-employedentrepreneursdi¤ermarkedlyfromtheonesconsistentwithbillionaires.Wherewell-protectedprivatepropertyrightsandsup-porting,market-enhancinginstitutions‡ourish,sodobillionaires.Butself-employeden- 5Or,what’ssimilar,theyanalyzesmallbusinessownership(see,forinstance,GentryandHubbard2004;HurstandLusardi2004;Djankovetal.2006;Paulson,Townsend,andKaraivanov2006).LookingattheUnitedStates,Holtz-Eakin,Joulfaian,andRosen(1994a,1994b)considerpersonswho…lescheduleCswiththeirincometaxreturns.6GEMalsohasavariablecalled“high-expectationentrepreneurship.”Itmeasuresthefrequencyof…rmownerswhosaythattheyintendtohire20employeesormoreoverthenext…veyears.Otherapproachestocapturinghigh-impactentrepreneurshipinclude,forinstance,distinguishingself-employed…rmsandspino¤sfromlargercompanies(AnderssonandKlepper2012)andmeasuringventurecapitalinvestments(LernerandTåg2012).7Ourpaperisalsocloselyconnectedtothelargeliteraturethatconsidersinstitutionaldeterminantsofentrepreneurialactivityacrosscountries.See,forinstance,Fonseca,Lopez-Garcia,andPissarides(2001),OvaskaandSobel(2005),Holtz-EakinandRosen(2005),KanniainenandVesala(2005),GriloandThurik(2005,2008),HallandSobel(2006),Klapper,Laeven,andRajan(2006),Stel,Story,andThurik(2007),Sobel,Clark,andLee(2007),HoandWong(2007),andAidis,Estrin,andMickiewicz(2009).3 trepreneursdon’t.Whereprivatepropertyrightsareweaklyprotectedandinterventionistinstitutions‡ourish,sodoself-employedentrepreneurs.Butbillionairesdon’t.Finally,onlytheinstitutionsthatwe…ndareconsistentwithbillionairesarealsoconsis-tentwiththeinstitutionsthatunderlieeconomicprosperity.Theinstitutionsthatwe…ndareconsistentwithself-employedentrepreneursaretheonesassociatedwithcomparativeeconomicpoverty.2InstitutionsandEntrepreneurship2.1ProductiveandUnproductiveWilliamBaumol(1990)distinguishestwoformsofentrepreneurship:“productive”and“un-productive.”Productiveentrepreneurialactivityimprovesresources’socialvaluethroughinnovation.Indoingsoitcreateswealthandcontributestoprosperity.Productiveen-trepreneurswhoseinnovationcreatesenormouswealthgenerateenormouspro…ts.Theseentrepreneursarebillionaires.Unproductiveentrepreneurialactivitywastesresourcesthroughrentseeking.Inusingresourcesinwaysthatcreatelesssocialvaluethanalternativeuses,unproductiveentrepre-neurialactivityundermineswealthcreationandcontributestopoverty.Institutionschannelentrepreneurialactivityproductivelyorunproductively.Theydosobydeterminingtherelativepayo¤ofsociallyproductiveinnovationversusrentseeking.“Limitedgovernments”whereinstateauthorityisusedtode…neandenforcepropertyrightsbutotherwiseintervenesminimallywiththeoperationofmarketstendtochannelentre-preneurialactivityproductively.Intheseinstitutionalenvironmentsinnovation’spayo¤iscomparativelylarge.Rentseeking’spayo¤iscomparativelysmall.“Unlimitedgovernments”whereinstateauthorityneglectsprivatepropertyprotectionandisusedtointervenesigni…cantlywiththeoperationofmarketstendtochannelentrepre-neurialactivityunproductively.Intheseenvironmentsinnovation’spayo¤iscomparativelysmall.Rentseeking’spayo¤iscomparativelylarge.Alargeempiricalliteraturecon…rmsthattheformerinstitutionalenvironmentspro-4 ducewealth,whilethelatterinstitutionalenvironmentsproducepoverty(see,forinstance,Acemoglu,Johnson,andRobinson2001;AcemogluandJohnson2005;Gwartneyetal.1999;Scully1988).8Baumol’sdistinctionsuggestsareadyreasonforthisresultinthelan-guageofentrepreneurship.Institutionsofprivatepropertyprotectionandmoreconstrainedgovernment—whatwecall“idealinstitutions”—encourageproductiveentrepreneurshipanddiscourageunproductiveentrepreneurship.Institutionsofweakpropertyprotectionandlessconstrainedgovernment—whatwecall“inferiorinstitutions”—dothereverse.2.2EvasiveInstitutionsnotonlychannelentrepreneurialactivity.Theyin‡uencethesupplyofentre-preneursbyin‡uencingtherelativepayo¤ofworkingforothersversusself-employment.Individualschooseself-employmentoverworkingforotherswhenself-employmentismorelucrative.Underidealinstitutionsthisiswhenself-employmentcreatesmoresocialvalue.Hereself-employmenttendstore‡ectproductiveentrepreneurship.Incontrast,underinferiorinstitutionsindividualsmay…ndself-employmentmorelucra-tivethanworkingforothersevenwhenself-employmentcreateslesssocialvalue.9Hereself-employmenttendstore‡ectunproductiveentrepreneurship.Thereasonforthisisstraight-forward.Governmentscanmoreeasilyregulateandexpropriatelarge…rmswithmanyemployeesthansmall,self-employed…rmswithfewemployees.Thelatter…nditeasierto‡ybelowthestate’sradar(deSoto1989).Becauseofthis,politicalrulesthatdirectlyorindirectlytaxlarger…rmsandtheiremployeesdriveawedgebetweenindividuals’payo¤ofworkingforothersandtheirpayo¤fromself-employment.Thatwedgecanmakeself-employmentmorelucrativethanworkingforothersevenwhenself-employmentcreateslesssocialvalue.Anindividualmayproducelessvalueinself-employment.But(s)he’sabletokeepalargershareofwhat(s)heproduces,inducinghim/her 8Foradiscussionofthisliterature,asummaryofitsbasicresults,andthetheorythatunderliesthem,seeLeeson(2008,2010).9Inferiorinstitutionsdescriberealityinmanythirdworldcountries.However,developedcountrieswithgenerallyfavorableinstitutionalclimatesmayalsohaveinferiorinstitutionalelementsofsuchpolicies,suchasexcessivetaxesandregulations.See,forexample,DavisandHenrekson(2010)whohighlighttheeconomicallydeleteriouse¤ectsofpenalizingentrepreneurialwealthcreationinSweden.5 tochooseself-employmentoverworkingforothersnonetheless.Thus,comparedtounderidealinstitutions,underinferiorinstitutionsthere’san“oversupply”ofentrepreneurs.CoyneandLeeson(2004)callentrepreneurialactivitythatmanifestsitselfintheformofself-employmenttocircumventpoliticalrulesthatarti…ciallydepressthepayo¤fromemploymentforothers“evasiveentrepreneurship”.Evasiveentrepreneurialactivityisoftenunproductive.Itoftenusesresourcesinwaysthatcreatelesssocialvaluethanalternativeuses.10Theincentivesdrivingevasiveentrepreneurshaveanimportante¤ectonthefractionofself-employedbusinessownersunderinferiorinstitutionalenvironmentswhowillbecomebillionaires.Evasiveentrepreneursdon’tenterself-employmenttoinnovateandgrow.Indeedgrowingwouldunderminetheveryreasontheyenterself-employmentinthe…rstplace.Thereforefew,ifany,willcreateenormoussocialvalue.Thatinturnmeansthatfew,ifany,willbecomebillionaires.Further,inferiorinstitutionsconstrainentrepreneurs’abilityandincentivetoinnovateandgrowpastsomepoint,evenforthosewhoseself-employmentisproductiveandthuscapableofcreatinglargesocialvalue.Forexample,withweakprivatepropertyrights,eventhemosttalentedentrepreneurswill…ndithard,andoftenunpro…table,tocreatelarge…rms.Asaresulttherearefewerbillionaires,curtailingentrepreneurs’andsociety’swealthcomparedtowhattheywouldotherwiseenjoy.2.3TestableImplicationsTheforegoingdiscussionyieldsseveralpredictionsabouttherelationshipsweexpectto…ndbetweeneconomicdevelopment,institutions,andentrepreneurship:First,weexpectbillionairestobemoreprevalentincountrieswhoseinstitutionsareclosertotheidealthanincountrieswhoseinstitutionsarefurtherfromitandviceversa.Intheformercountriesalargerproportionofentrepreneurialenergyischannelledproductively. 10Althoughtheresourcesthatevasiveentrepreneurshipusestocircumventpoliticalrulesthatarti…ciallydepressthepayo¤fromemploymentforothersarenecessarywastedfromasocialperspective,inthepresenceofinferior,or“second-best,”institutionsthatcreatebarrierstoproductiveentrepreneurialactivity,evasiveentrepreneurshipmaypermitvalue-creatingeconomicactivitytotakeplaceandinthissensebeproductive.See,forinstance,Rodrik(2008)andDouhanandHenrekson(2010).6 Entrepreneurshavestrongerincentivestocreateasmuchsocialvalueastheycan.Andmorepersonswhofoundbusinessesandemploythemselvesaimtodothat.Thusthepotentialforbillionairesishigher.Second,weexpectself-employedentrepreneurstobemoreprevalentincountrieswhoseinstitutionsarefurtherfromtheidealthanincountrieswhoseinstitutionsareclosertoitandviceversa.Intheformercountriesalargerproportionofentrepreneurialenergyischanneledunproductively.Individualshavestrongerincentivestoengageinevasiveentrepreneurship.Thusthepotentialforself-employedentrepreneurshipishigher.Third,weexpectbillionairestobemoreprevalentinrichercountriesthaninpooreronesandviceversa.Billionairescreateimmensewealth.Theymakethecountriestheyarelocatedinricher.Further,followingthelogicabove,billionairesshouldbemoreprominentincountrieswhoseinstitutionalenvironmentsareclosertoideal.Thesearericherones.Finally,weexpectself-employedentrepreneurstobemoreprevalentinpoorercountriesthaninricheronesandviceversa.Evasiveentrepreneursoftenunderminewealthcreationbyallocatinglaborresourcestoself-employedbusinessownershipthatwouldcreatemoresocialvalueinwagelabor.11Further,becauseself-employedentrepreneursareoversuppliedincountrieswhoseinstitutionalenvironmentsarefurtherfromtheideal,self-employeden-trepreneursshouldbemoreprominentinthem.Thesecountriesarepoorerones.3DataToexploretherelationshipsbetweeneconomicdevelopment,institutions,andentrepreneur-shipempiricallyweuseseveraldatasources.Weconstructanewcross-countrydatasetonbillionairesusingForbesMagazine’slistof“TheWorld’sBillionaires.”Forbescompilesthislistannually.WeconsiderbillionaireswhoappearonForbes’listatleastoncebetween1996and2010.Forbesidenti…eseachbillionaire’snetworthandcountryofcitizenship.Between1996and2010thisincludes1,723uniquepersons.Someofthesebillionairesaren’tentrepreneurs. 11Though,asnotedabove,undersecond-bestinstitutions,evasiveentrepreneurshipmaynotmeanwealtherosionifself-employmentpermitsvalue-creatingeconomicactivitythatinstitutionalconstraintswouldoth-erwisepreclude.7 Theydidn’tproducetheirfortunesbystartingandgrowingcompanies.Sincewe’reinterestedonlyinthosewhodid,weneedtoidentifythesubsetofthese1,723billionaireswhoacquiredtheirfortunesbyfoundingandgrowingnewbusinesses.Todosowecollectinformationonthesourceofeachbillionaire’swealth.Forbesoftenprovidesthisinformation.Whenitdoesn’t,weconsultexternalsourcestodeterminehowbillionairesmadetheirfortunes.Mostoftheworld’sbillionaires,58percent,acquiredtheirwealthbystartingandgrowingbusinesses.This…gureislowerinEurope,whereonly42percentofbillionairesmadetheirmoneythisway,thanintheUnitedStates,where65percentdidso.Amongbillionaireswhodidn’tacquiretheirwealthentrepreneurially,manyacquiredtheirwealththroughbequestsorareCEOswho,thoughhiredbyentrepreneurialstartups,aren’tthemselvesentrepreneurs.Othernon-entrepreneurialbillionairesonForbes’listinclude…-nancialsectortraders,law…rmpartners,entertainers,andwildlysuccessfulauthors.Inrarecaseswhenwecouldn’t…ndinformationaboutabillionaire’swealthsourcewecodedhim/herasanon-entrepreneur.Ourresultsaren’tsensitivetoincludingtheseambiguouspersonsinoursample.Afterexcludingnon-entrepreneurbillionaireswe’releftwithjustunderathousand(996)billionaireentrepreneursfrom51countries.Thesebillionairesincludemanyarchetypicalentrepreneurs,suchasBillGates(Microsoft),SteveJobs(Apple),GordonMoore(Intel),LarryEllison(Oracle),Je¤Bezos(Amazon.com),LarryPage(Google),WarrenBu¤ett(BerkshireHathaway),MichaelDell(DellInc.)andMarkZuckerberg(Facebook).Wedividethenumberofbillionairesineachcountrybythatcountry’spopulationinmillionsusingpopulationdatafor2009fromtheInternationalMonetaryFund(IMF).Theresultingvariablemeasurespercapitabillionairesacrosscountries.TheAppendixprovidessummarystatisticsforourbillionairevariable.12Thatvariable,whichaimstomeasuretheprevalenceofproductivebillionaireentrepre-neurs,isunavoidablyimperfect.Althoughourdataexcludenon-entrepreneurialbillionaires,we’reunabletosimilarlyexcludeallbillionaireentrepreneurswhoengagedinunproductiveentrepreneurialactivity,suchasrentseeking,toacquiretheirwealth.Wecarefullyinspect 12Alistofthecountriesinourbillionairessampleandtheirratesofbillionairesisavailableonrequest.8 thebillionairesinourdatatogetasenseoftheincidenceof“suspicious”billionaires:thosewhosewealthmayre‡ectsigni…cantunproductiveentrepreneurialactivity.Theirincidenceislow.Inafewinstances,suchasthecaseofbillionairegovernmentrulers,forexam-pleSuharto,Indonesia’sformerpresident,wecancon…dentlyexcludebillionairesonthesegrounds.Butinmostcaseswecan’tobservetowhatextent,ifany,thebillionairesinourdatausedthepoliticalprocesstohelpthembecomesuperrich.Whileit’simportanttokeepthislimitationinmindwhenconsideringourresults,becausemostofthebillionairesinourdataarelocatedindevelopedcountrieswhoseinstitutionalenvironmentsdoareasonablejobofchannellingentrepreneurialactivityproductively,wecanbemorecon…dentthatourbillionairesvariablemeasuresproductiveentrepreneurshipasopposedtotheunproductivevariety.Further,aswediscussbelow,ourresultsholdwhenwerestrictoursampletoOECDcountrieswhereourcon…dencethatourbillionairesvariablemeasuresproductiveentrepreneurialactivityisstrongerstill.Toconstructourself-employedentrepreneurvariablewecollectdatafromtheOECD(2009),whichcomputesthepercentageofeachcountry’snon-agriculturalworkforcethat’sself-employed.TheOECDgetsitsdatafromtheInternationalLabourOrganization(ILO).TheILOde…nes“self-employmentjobs”as“jobswheretheremunerationisdirectlyde-pendentuponthepro…ts(orthepotentialforpro…ts)derivedfromthegoodsandservicesproduced(whereownconsumptionisconsideredtobepartofpro…ts).Theincumbentsmaketheoperationaldecisionsa¤ectingtheenterprise,ordelegatesuchdecisionswhileretainingresponsibilityforthewelfareoftheenterprise”where“‘enterprise’includesone-personop-erations.”Formostcountriesweconsiderself-employmentratesfortheyear2000.WhendataforthisyearareunavailableweusedataforthemostrecentavailableyearcollecteddirectlyfromtheILOdatabase.TheAppendixprovidessummarystatisticsforourself-employedentrepreneurvariable.13 13Thelistofthecountriesinourself-employedentrepreneurssampleandtheirratesofself-employedentrepreneurshipisavailableonrequest.9 4EmpiricalRelationshipsOurempiricalanalysisfocusesonidentifyingrelationshipsbetweeneconomicdevelopment,institutions,anddi¤erentkindsofentrepreneurshipacrosscountriesintherawdata.Wemakenoattempttocontrolforotherfactorsthatmayin‡uencetherelationshipsbetweenthesevariables.14Thenumberofotherfactors,forexample,education,culture,andreligion,islarge.Further,dataavailabilityforthefactorswedoconsidervaries.Thusthecountriesincludedinourdepictionoftherelationshipbetweenregulatoryclimatesandbillionaires’prevalencedi¤ersomewhatfromthecountriesincludedinourdepictionoftherelationshipbetweenpropertyrightssecurityandbillionaires’prevalence.Finally,thereadershouldkeepinmindthatourapproachprecludesde…nitivecausalinference.Despitetheselimitations,therawdataprovideevidenceofcompellingconnectionsbe-tweeneconomicdevelopment,institutions,billionaires,andself-employedentrepreneurscon-sistentwiththeabovereasoningabouthowthesevariablesmayberelated.4.1BillionairesBillionairesaredistributedunevenlythroughouttheworld.Figure1depictsthenumberofbillionairespermillioncitizensforeachcountryinoursample.InHongKong,wherebillionairesaremostprevalent,therearemorethan2.8billionairespermillioncitizens.InNigeria,wherebillionairesareleastprevalentamongcountriesthathaveanybillionairesatall,therearefewerthan0.007billionairespermillioncitizens.Figure2plotsbillionairespermillioncitizensacrosscountriesagainstcountries’averageincome.Ourincomedatameasurecountries’PPP-adjustedpercapitaGDPsin2009.WecollectthesedatafromtheIMF.TherelationshipinFigure2isstrong,positive,andstatis-ticallysigni…cant.Richercountrieshavemorebillionaires.Poorercountrieshavefewer.15Economictheorytellsussomethingaboutthesourceofvariationincountries’wealth 14Thisisaslightoverstatement.Aswediscussbelow,inadditiontoconsideringeachofourrelationshipsusingourfullsample,wealsoconsiderthemusingasamplethatconsistsonlyofOECDcountries.Thelatterrelationshipscontrolcrudelyforaverageincome.15Manycountrieshavenobillionaires.Thusinthisandoursubsequent…guresthatconsiderbillionairesaclusterofcountriesappearsalongthehorizontalaxis.Ourresultsarerobustto,andinfactgrowstronger,excludingthem.10 andpoverty.Weelaboratedthatsomethingabove:countries’institutionaldi¤erences.Thosedi¤erencesinturnchannelentrepreneurialenergydi¤erently.Institutionalenvironmentsthatbetterprotectcitizens’privatepropertyrightsanddolesstointerveneinthemarketplacechannelalargershareoftheircitizens’entrepreneurialenergyproductively.Thusthefactthatbillionairesaresigni…cantlymoreprevalentinrichcountriesstrengthensourcon…dencethatourbillionairevariablecapturesproductiveentrepreneurs.ThereasoningdescribedinSection2suggeststhatbillionaires’distributiondependssigni…cantlyonsuperiorinstitutionalenvironments’distribution.Toexaminethisconnectionmoredirectly,weconsidertherelationshipbetweencountries’institutionalenvironmentsandbillionaires’prevalence.TheFraserInstituteproducesanindexof“economicfreedom”thatmeasurestheextenttowhichgovernmentprotectscitizens’privatepropertyrightsandintervenesinthemarketacrosscountries.Economicfreedomprovidesareasonablewayofmeasuringhowfarvariouscountries’institutionalenvironmentsarefromtheidealenvironmentdescribedinSection2.WeusetheFraserInstitute’seconomicfreedomscoresfor2008.Thesescoresrangefrom0to10.Countrieswithhigherscoresareclosertotheideal.Countrieswithlowerscoresarefurtherfromit.Figure3plotstherateofbillionairesacrosscountriesagainsttheireconomicfreedomscores.TherelationshipinFigure3ispositiveandstatisticallysigni…cant.Thecorrelationbetweencountries’economicfreedomandtheprevalenceofbillionairesis0.46.Countrieswhoseinstitutionalenvironmentsaremoreconducivetoproductiveentrepreneurshiphavemorebillionaires.Countrieswhoseinstitutionalenvironmentsarelessconducivetoproduc-tiveentrepreneurshiphavefewer.Economicfreedomisaverybroadwaytomeasuretheextenttowhichcountries’institu-tionalenvironmentsdeviatefromtheideal.It’susefultoexaminetherelationshipbetweenvariationinparticularinstitutionsandvariationinbillionaires.Todothiswe…rstconsidercountries’regulatoryclimates.TomeasuretheburdenthoseclimatesimposeonproductiveentrepreneurialactivityweusedatafromtheWorldBank’s“EaseofDoingBusinessIndex.”Thisindexrankscountriesaccordingtohowconducivetheirregulatoryclimateistodo-ingbusinessin2008.Lowernumbersindicatehigherranksandthusmorebusiness-friendly11 regulatoryclimates.Figure4depictstherelationshipbetweencountries’regulatoryclimatesandthepreva-lenceofbillionaires.Therelationshipisnegativeandstatisticallysigni…cant.Thecorrelationbetweencountries’regulatoryclimatesandtheprevalenceofbillionairesis-0.45.Countrieswithlessburdensomebusinessregulatoryclimateshavemorebillionaires.Countieswithmoreburdensomebusinessregulatoryclimateshavefewer.Nextweconsidertherelationshipbetweenbillionaires’prevalenceacrosscountriesandhowwellcountriesprotectcitizens’privatepropertyrights.TodosoweusedatafromthePropertyRightsAlliance’s“InternationalPropertyRightsIndex”(IPRI).TheIPRIvariablemeasuresthestrengthofcitizens’privatepropertyrightsin2010.Propertyrights’scoresrangefrom0to10wherehigherscoresre‡ectmoresecureprivatepropertyrights.ThereasoninginSection2suggeststhatincountrieswhoseinstitutionalenvironmentsprotectprivatepropertyrightsbetter,citizenswilldevotealargershareoftheirentrepreneur-ialenergytoproductiveactivities.Thus,consistentwiththerelationshipsidenti…edabove,weshould…ndmorebillionairesincountriesthatscorebetteronIPRI’sprivatepropertysecuritymeasureandfewerbillionairesincountriesthatscoreworse.Wedo.Figure5presentstherelationshipbetweencountries’institutionalenvironmentsintermsofprivatepropertysecurityandbillionaires.Therelationshipispositiveandstatis-ticallysigni…cant.Thecorrelationbetweencountries’propertysecurityandtheprevalenceofbillionairesis0.49.Whereprivatepropertyrightsaremoresecure,therearemorebillion-aires.Wherethoserightsarelesssecure,therearefewer.Finally,weconsidertherelationshipbetweenbillionaires’prevalenceacrosscountriesandcountries’legalorigins.AsGlaeserandShleifer(2002)pointout,countrieswithEnglishlegaloriginshavecommonlawtraditions.Thesecountriestendtohaveinstitutionalenvironmentsthataremoreconducivetoproductiveentrepreneurialactivity.Incommonlawcountriesgovernmentdoesmoretoprotectcitizens’privatepropertyrights;regulatoryrulesaremorebusinessfriendly;andthestatedoeslesstointerveneintheoperationofmarkets.16Countrieswithnon-Englishlegaloriginshavecivillawtraditionsinstead.Inthesecoun-triesthesituationisreversedfromwhatwedescribeabove.Governmentdoeslesstoprotect 16Onthepolitical-economicimplicationsofthecommonlaw,seealsoHayek(1960).12 citizens’privatepropertyrights;regulatoryrulesarelessbusinessfriendly;andthestatein-tervenesmoreintheoperationofmarkets.Heretherelativepayo¤ofevasiveandotherformsofunproductiveentrepreneurshipishigher.Wethereforeexpectto…ndmorebillionairesincountrieswithEnglishlegaloriginsthanelsewhere.ToexaminethispossibilityweusedataonlegaloriginsfromLaPortaetal.(1997).ThesedataclassifycountriesaccordingtowhethertheirlegalinstitutionshaveEnglish,German,Scandinavian,orFrenchorigins.LaPortaetal.’slegaloriginsvariablecovers47countries.28ofthesecountriesaredeveloped.19arenot.TherearebothdevelopedandundevelopedcountrieswithEnglishandFrenchlegalori-gins.However,allcountrieswithGermanorScandinavianlegaloriginsaredeveloped.Sincebillionairesarestronglycorrelatedwithaverageincome,it’ssensibletolimitattentiontodevelopedcountriesinordertobetterisolatehowvariationincountries’legalorigins,ratherthanvariationintheirincome,mayberelatedtovariationinbillionaires’prevalence.Theresultswepresentbelowdothis.However,ifweconsiderall47countriesforwhichLaPortaetal.supplydata,our…ndingremainsqualitativelyunchanged.Figure6presentstherelationshipbetweenbillionairesandlegalorigins.Asexpected,billionairesaremoreprevalentincommonlawcountriesthanincivillawones.Indeed,theyaremorethantwiceasprevalentincountrieswithEnglishlegaloriginsthantheyareincountrieswithcivillawtraditionswherebillionairesaremostprevalent—thosewithGermaniclegalorigins.Billionairesaremorethan…vetimesasprevalentincountrieswithEnglishlegaloriginsthantheyareincountrieswithcivillawtraditionswherebillionairesareleastprevalent—thosewithFrenchlegalorigins.Toensurethatpoorcountriesaren’tdrivingtherelationshipswe…ndinFigures2-6and,closelyrelated,tominimizethepossibilitythatourbillionairesvariablecontainscasesofunproductiveentrepreneurship,wereconsidereachoftherelationshipsconsideredaboverestrictingourattentiontoOECDcountriesonly.Theresultsaresimilarineachcase:billionairesaremoreprevalentinrichercountriesandcountrieswhoseinstitutionalenviron-mentsbetterprotectcitizens’propertyrightsandintervenelessinmarkets.Theyarelessprevalentinpoorercountriesandcountrieswhoseinstitutionalenvironmentsdoaworsejobofprotectingcitizens’propertyrightsandintervenemoreinmarkets.13 TakentogethertherelationshipsthatFigures2-6identifysuggesttwoimportantconclu-sions.First,ourbillionairesvariableisagoodmeasureofproductiveentrepreneurship.Ininstitutionalenvironmentswhereweexpectproductiveentrepreneurshipto‡ourish,billion-aires‡ourish.Ininstitutionalenvironmentswhereweexpectunproductive,andinparticularevasive,entrepreneurshipto‡ourish,billionairesdon’t.Second,althoughouranalysisprecludesconclusivecausalinterpretations,billionaires’greaterprevalenceincountrieswithsuperiorinstitutionalenvironmentssuggeststhatcross-countryvariationinhowwellgovernmentprotectscitizens’propertyrightsbutotherwiselimitsitsinvolvementinthemarketmaybeanimportantdeterminantofcross-countryvariationinbillionaires.Closelyrelated,billionaires’greaterprevalenceinrichercountriessuggeststhatcross-countryvariationinbillionairesmaybeanimportantdeterminantofcross-countryvariationinwealth.4.2Self-EmployedEntrepreneursToseehoweconomicdevelopmentandinstitutionalenvironmentsmayberelatedtoself-employedentrepreneurs’prevalence,inthissectionweexaminethesamesetsofrelationshipsweconsideraboveforbillionairesbutforself-employedpersonsinstead.Thedataweuseandtheyearsourdatacoverarethesameonesweusetoexaminebillionaires.Thesetofcountriesdepictedinourself-employment…guresdi¤erssomewhatfromthatdepictedinourbillionaires…guressinceself-employmentdataanddataforourincomeandinstitutionalvariablesaren’talwaysavailableforthesamecountriestheyareavailableforinthecaseofbillionaires.Toanticipatewhatwe…ndforself-employedentrepreneurs,considerFigure7.Inthis…gurewedepicttherelationshipbetweenbillionaires’prevalenceandself-employedentrepre-neurs’prevalenceacrosscountries.Therelationshipisnegativeandstatisticallysigni…cant.Countrieswithmorebillionaireshavefewerself-employedpersonsandviceversa.ThepatterninFigure7suggeststwothings.First,billionairesandself-employmentmeasuretwodi¤erententrepreneurialphenomena.Second,givenwhatweknowfromaboveabouttherelationshipsbetweenbillionaires,percapitaincome,andinstitutionalenviron-ments,thepatterninFigure7suggeststhattherelationshipswewill…ndwheninvestigating14 self-employedentrepreneursarelikelytobetheoppositeoftheoneswe…ndforbillionaires.Sincebillionairesareassociatedwithrichercountriesandcountrieswithsuperiorinstitu-tionalenvironments,thismeansself-employedentrepreneursarelikelytobeassociatedwithpoorercountriesandcountrieswithinferiorinstitutionalenvironments.Thisispreciselywhatwe…nd.Likebillionaires,self-employedentrepreneursaredistributedunevenlythroughouttheworld.ConsiderFigure8.This…guredisplayshowvariationincountries’averageincomeisrelatedtovariationintherateofself-employment.Therelationshipisstrongandstatisticallysigni…cant,butnegative—theoppositeofwhatwe…ndforbillionaires.Poorercountrieshavemoreself-employedentrepreneurs.Richercountrieshavefewer.17Investigatingtherelationshipbetweenself-employedentrepreneursandcountries’institu-tionalenvironmentsalsoyieldsoppositeresultsfromwhatwe…ndforbillionaires.ConsiderFigure9.This…guredepictstherelationshipbetweencountries’economicfreedomandrateofself-employment.It’sstrong,negative,andstatisticallysigni…cant.Thecorrelationbetweencountries’economicfreedomandrateofself-employmentis-0.60.Nextweexaminetheconnectionbetweencountries’regulatoryclimatesandtheirratesofself-employment.ConsiderFigure10.Thisrelationshipstrongandstatisticallysigni…cant.Butit’spositive—theoppositeofwhatwe…ndwhenconsideringbillionaires.Thecorrelationbetweencountries’regulatoryclimatesandrateofself-employmentis0.61.Countrieswithmoreburdensomeregulatoryclimateshavemoreself-employedentrepreneursandviceversa.Similarly,we…ndtheoppositerelationshipbetweenself-employedentrepreneursandthesecurityofcitizens’propertyrightsthatwe…ndforbillionaires.ConsiderFigure11. 17Wennekeretal.(2010)suggestthattherelationshipbetween“self-employment”andeconomicdevel-opmentmaybeU-shaped.Thatsuggestionismisleading.Theymeasure“self-employment”bybusinessownershipandbusinessentry,orstart-uprates(and…ndaU-shapedrelationshiponlyinthecaseofthelatter).Thesevariablesareofcoursedi¤erentfromactualself-employment—therateofnon-agriculturalself-employment—whichisthispaper’smeasureofself-employment.Forexample,intheU.S.morethanathirdofbusinessownersaren’temployedbytheirbusinessesandthusaren’tcountedasself-employed.Further,someself-employedpersonswithverysmallbusinessesaren’tcountedasbusinessownersbecausetheirbusinessesaretoosmall.Thesedi¤erencesareimportant.Forinstance,usingbusinessownershiptomeasureself-employment,Wennekeretal.(2010)…ndthat“self-employment”fortheOECDasawholeincreasedbetween1972and2007.Usingself-employmentratestomeasureself-employment,we…ndthatself-employmentfortheOECDasawholedecreasedbetween1972and2007.Althoughsomevariablescommonlyusedtoproxyself-employmentmaydisplayaU-shapedrelationshiptoaverageincome,self-employmentitselfdisplaysanegativerelationship.15 Therelationshipisstrong,negative,andstatisticallysigni…cant.Thecorrelationbetweencountries’propertysecurityandrateofself-employmentis-0.58.Wherecitizens’privatepropertyrightsarelesssecure,therearemoreself-employedentrepreneurs.Whereprivatepropertyrightsaremoresecure,therearefewer.Finally,inFigure12weseehowcountries’legaloriginsarerelatedtotheirratesofself-employment.Weagainlimitourattentiontodevelopedcountries.Andweagain…ndnearlytheoppositeofwhatwe…ndwhenwelookatbillionaires.Withoneexception—countrieswithScandinavianlegalorigins—self-employmentislessprevalentincommonlawcountries,whoseinstitutionalclimatesaremoreconducivetoproductiveentrepreneurship,andmoreprevalentincivillawcountries,whoseinstitutionalclimatesaremoreconducivetoevasiveandotherformsofunproductiveentrepreneurship.18IncountrieswithFrenchlegalorigins,where,recall,billionairesareleastprevalent,self-employedentrepreneursaremostprevalent.Indeed,self-employedentrepreneursare46percentmoreprevalentincountrieswithFrenchlegaloriginsthantheyareincountrieswithEnglishlegalorigins.Aswedoforbillionaires,wereconsidereachoftherelationshipsinFigures8-12restrictingattentiontoOECDcountriesonly.Theresultsareagainsimilar:self-employedentrepreneursaremoreprevalentinpoorercountriesandcountrieswithinstitutionalenvironmentsthatprovideworseprotectionofcitizens’propertyrightsanddomoretointerveneinmarkets.Ourempiricalanalysispreventsusfromdrawingde…nitivecausalinferences.Still,takentogether,theresultsinFigures8-12suggestthatmuchself-employedentrepreneurshipmaybeunproductive.AsdiscussedinSection,2muchofthisentrepreneurshipmaybeoftheevasivevariety.Self-employedentrepreneurship’sstrongnegativerelationshipwithaverageincomeandtheextenttowhichinstitutionalenvironmentsprotectcitizens’privatepropertyrightsandleavemarketsalonetooperatefreely—thereverseofwhatwe…ndforbillionaires—aretherelationshipswouldexpectto…ndifthiswasthecase. 18Ifweconsiderall47countriesforwhichLaPortaetal.supplydata,countrieswithFrenchlegaloriginscontinuetohavethemostself-employedentrepreneurs.CountrieswithScandinavianlegaloriginscontinuetohavethefewest.However,butthepositionsofcountrieswithEnglishlegaloriginsandthosewithGermaniconesreverse.16 5ConcludingRemarksOuranalysisleadstothreeimplicationsofpotentialimportforpolicymakers.First,self-employmentmaybeanegativeindicatorofwhetheracountry’sinstitutionalarrangementsleverageentrepreneurshipforeconomicprogress,notapositiveone.We…ndthatself-employedentrepreneursareassociatedwithpoverty,notwealth.Thuspolicymakersthatseektouseself-employedentrepreneurs’prevalenceasagaugeforinstitutionalreformmaywanttothinktwicebeforeinvokingself-employmentasameasureofsuccess.Reformsthatincreaseself-employmentmaybemovingacountry’sinstitutionalenvironmentinthewrongdirectionratherthantherightonefromtheperspectiveofeconomicprogress.Billionaires’prevalencemaybeabetterbenchmarkforpolicymakersconsideringreforms.Thisvariableispositivelyassociatedwithwealth.Unsurprisingly,it’salsopositivelyasso-ciatedwiththeinstitutionalenvironmentsknowntoencourageproductiveentrepreneurialactivityandeconomicprosperity:strongprivatepropertyrights,lowregulation,andlight-handedinterventioninmarkets.Thusareformthatleadstoanincreaseintherateofbillionairesoraimstoincreasethatrateismorelikelytobeoneindicativeofmovementintherightdirectionfromtheperspectiveofeconomicprogress.Second,ouranalysissuggeststhatpolicymakersinterestedinpromotingentrepreneur-shipasameansoffosteringeconomicdevelopmentmaydobesttofocustheirattentionontheoverarchinginstitutionsthatpromotethelatterratherthanfocusingonpromotingentrepreneurshipperse.Whengrowth-enhancinginstitutionsareinplace,productiveentre-preneurshiptakescareofitself.AsAdamSmith(1776:xliii)putit,“Littleelseisrequisitetocarryastatetothehighestdegreeofopulencefromthelowestbarbarism,butpeace,easytaxes,andatolerableadministrationofjustice;alltherestbeingbroughtaboutbythenaturalcourseofthings.”Thekeycomponentof“alltherest”that’s“broughtaboutthenaturalcourseofthings”isproductiveentrepreneurship.Institutionsestablishtheframeworkforeconomicdevelopment.Productiveentrepre-neurialactivityisthemechanismwherebythatframeworkproducesprosperity.Billionaires’greaterprevalenceincountrieswhoseinstitutionalenvironmentscomportmorecloselywiththeidealandarerichersupportsthisnotion.Theproductiveentrepreneurialmechanismis17 “automatic”inthepresenceofinstitutionsthatprotectpropertyrightsandallowmarketstooperatefreely.Thisbringsustothe…nalpolicyrelevantimplicationofouranalysis.Intheabsenceofwell-protectedpropertyrightsandlight-handedstateinterventioninmarkets,policymakers’e¤ortstoencourageentrepreneurialactivity,suchassubsidizingbusinessstartups,businesstraining/education,orsubsidizingsmallbusinessgrowth,maycreateaworsestateofa¤airsfromtheperspectiveofeconomicdevelopmentthandoingnothingatall.Atleastsomesuche¤ortsmayhavetheoppositee¤ectofwhat’sneeded.Thesee¤ortsraisetherelativepayo¤ofevasiveentrepreneurship,makingitevenmorelikelythatproducerswhosesocialvalueishigherinwagelaborwillturntoself-employmentwheretheirsocialvalueislower.Equallyimportant,smallbusinesssubsidiesandrelatedattemptstoencourageentrepre-neurshipdirectlycostsomething.Thefundingforthemmustberaisedbytaxingproductiveentrepreneurswhosepropertyrightstoproductivelygeneratedpro…tisconcomitantlydi-minished.Totheextentthate¤ortstosparkentrepreneurshipperseincountriesthatlacktheinstitutionalregimesnecessarytochannelpro…tseekinginsociallyproductivewaysmayrequireadditionalregulations,forexamplerequirementsthatcompelestablishedbusi-nessownerstopurchaseacertainpercentageoftheirinputsfromstartup…rms,targetingentrepreneurshipperseinsuchenvironmentsaddssimilarlytothecostofproductiveentre-preneurialactivity.Byimposingadditionalcostsonproductiveentrepreneurialprojects,thesee¤ortsdis-couragethecreationandgrowthofproductivebusinesses,someofwhichmayhaveproducedbillionaires.Ifevenonebillionaireispreventedfromcomingintoexistenceasaconsequence,thee¤ectonsocialwelfareisenormous.Thecreationofspecialprogramsaimedatboostingentrepreneurshippersemayalsocreateanewsourceofrentsforunproductiveentrepreneurs,sappingsocialvaluethiswayaswell.18 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23 24 25 26 27 28 29 Statistics        Employment,                 Billionairesperpeople percentiledeviation