Economic development and business ownership: an analysis using data of 23 OECD countries in the period 1976-1996

In the present paper we address the relationship between the extent of business ownership and economic development. We will focus upon three issues. First, how is the equilibrium rate of business ownership related to the stage of economic development? Second, what is the speed of convergence towards the equilibrium rate when the rate of business ownership is out-of-equilibrium? Third, to what extent does deviating from the equilibrium rate of business ownership lead to a penalty of less economic growth? Hypotheses concerning all three issues are formulated setting up a new two-equation model. A basic aspect of the model is a U-shaped relation between the equilibrium rate of business ownership and the stage of economic development. The existence of this relation as well as that of a penalty for out-ofequilibrium situations is confirmed using a data panel of 23 OECD countries. An important policy implication of our exercises is that low barriers to entry and exit of businesses are necessary conditions for the equilibrium seeking mechanisms that are vital for a sound economic development.