The purpose of this paper is to develop an agent-based model that highlights the role of entrepreneurship in the market process.
The authors explore the effect of entrepreneurial alertness and transaction costs on two normative standards: the speed of price equilibration and the level of product diversity.
Both higher alertness and lower transaction costs lead to faster equilibration, as expected. High alertness contributes to high product diversity, also as expected. However, and counter-intuitively, lower transaction costs actually leads to lower levels of product diversity, as markets equilibrate before entrepreneurs can discover many new products.
The analysis provides new insight into entrepreneurship theory and policy.
The second author gratefully acknowledges support from an SJSU Economics Department research grant. The authors thank Robert Ragan, participants at APEE (Nassau) and three anonymous reviewers for valuable comments. All errors remain of the authors.
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