Entrepreneurial human capital and firm dynamics

This paper shows that entrepreneurial human capital is a key driver of firm dynamics using administrative panel data on the universe of firms and workers in Portugal. Firms started by more educated entrepreneurs are larger at entry and exhibit higher life cycle growth. Consistent with an effect on growth, the thickness of the right tail increases with entrepreneur schooling in the cross-section of firm size. I present evidence pointing to several underlying mechanisms, with technology adoption playing the most important part. I then develop and estimate a model of firm dynamics that can parsimoniously account for these findings, and use it to draw implications for the aggregate role of human capital. Accounting for the effect of entrepreneur schooling on firm dynamics can substantially increase aggregate returns to schooling and the fraction of cross-country income differences explained by human and physical capital.