The Review of Austrian Economics, 15:2/3, 143–159, 2002.
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Political Entrepreneurship and the Democratic
Allocation of Economic Resources
RANDALL G. HOLCOMBE firstname.lastname@example.org
Department of Economics, Florida State University, Tallahassee, FL 32306, USA
Abstract. Political entrepreneurship occurs when an individual acts on a political proﬁt opportunity. These proﬁt
opportunities can be divided into two categories: productive, and predatory. Productive opportunities enable
entrepreneurs to proﬁt from enhancing the efﬁciency of government, while predatory opportunities enable en-
trepreneurs to proﬁt from forcibly transferring resources from some to others. This analysis shows that political
institutions tend to favor predatory over productive political entrepreneurship, and shows that what is sometimes
referred to as political exchange does not have the same efﬁciency characteristics as voluntary exchange in private
Key Words: entrepreneurship, democracy, public choice
JEL classiﬁcation: H1 Structure and Scope of Government.
Political entrepreneurship occurs when an individual observes and acts on a political proﬁt
opportunity. As with market entrepreneurship, entrepreneurial actions require, ﬁrst, that
a proﬁt opportunity exists, second, that someone is alert enough to spot the opportunity
and recognize the opportunity for proﬁt, and third, that the individual is willing to act on
the opportunity once it is spotted. Each of these three requirements are common elements
of political and market entrepreneurship, yet in each of these requirements there are both
subtle and substantial differences between entrepreneurship in markets and in politics. The
fundamental differences arise from the fact that market exchange is based on voluntary
agreement, whereas political action always has an element of compulsion behind it. The
fact that force can be used to generate political outcomes produces two key differences
in the nature of political versus market entrepreneurship. First, opportunities for political
entrepreneurship will always exist. One might imagine an economy in complete general
equilibrium, implying that there are no unexploited proﬁt opportunities, but there will
always be opportunities for political proﬁt from the forced transfer of resources from some
to others. Second, whereas successful entrepreneurial acts will always be welfare-enhancing
in markets, that may not be true in politics, because the costs forced on the losers may be
less than the gains to the gainers.
In order to examine the welfare implications of political entrepreneurship, this paper ﬁrst
presents a framework that shows how entrepreneurial opportunities are generated in politics.
That framework clearly shows that acting on some entrepreneurial opportunities will en-
hance welfare, whereas acting on other opportunities will reduce welfare. This comparison
shows that entrepreneurial opportunities in politics and markets arise in different ways, and