Capitalist Human Capital

In this paper we ask the question of whether the managerial and organizational inputs of entrepreneurs enhance the efficiency of their businesses. We ask this question empirically using registry data from Norway. To identify the managerial skills of the entrepreneur (human capital) we explore how the productivity of the business changes after the premature death of the entrepreneur. We find that, if the entrepreneur is wealth-rich, the productivity of the business falls substantially (close to 40%) after the entrepreneur's death. This supports the view that entrepreneurs’ human capital adds value to the business. But why are the entrepreneurial skills only important for wealth-rich entrepreneurs? The empirical analysis reveals other interesting patterns. New firms founded by wealth-rich entrepreneurs are 40% more productive and they have twice higher capital compared to those founded by wealth-poor entrepreneurs. Furthermore, rich entrepreneurs tend to allocate more of their wealth in the business and hold more shares of the business. These findings show that the wealth of the entrepreneur plays an important role also for the financial structure of the business. Motivated by these empirical findings, we construct a quantitative structural model that is capable of capturing these patterns. In the model, risk-averse entrepreneurs can invest in financial assets and choose to run private businesses in an incomplete market environment. They face possible credit constraints and are heterogeneous in managerial human capital. We study how the entrepreneurs' human capital affects entry, exit, portfolio composition and the consequent macroeconomic implications.