Learning to Learn : Experimentation, Entrepreneurial Capital, and Development

This paper models an entrepreneur’s choice between investing in a safe activity or experimentingwith a new risky one, and how much to invest in the “entrepreneurial capital” that would permit more effectiveuse of the arriving information on the latter- how much to learn how to learn. Optimal investment in entrepreneurialcapital depends the expected return on the risky activity. It can lead to three learning regimes, two of which cangenerate a development trap where firms and countries are unable to assess the potential of newly arrivingtechnologies and hence grow more slowly. The first arises purely because it is too expensive to learn to learn, thesecond because the returns to the new activity are so high that they obviate the need to distinguish between activitiesand hence invest in entrepreneurial capital. The paper draws on historical evidence to show how the model offers insightsinto three understudied features of the industrialization process in the Western Hemisphere at the beginning of the20th century: the disproportionate influence of immigrant/foreign entrepreneurs in driving industrializationin Latin America; the emergence of selective exceptions tothis pattern, as well as episodes of entrepreneurial retrogression; and the differing effects of similar economicstructures across countries that suggest the possibility of a learning-displacing resource curse. The model can simulatethe respective decline and boom in the Chilean and US copper industries at the turn of the century, arising either frominitially high relative returns or low initial endowments of entrepreneurial capital in the latter.