Journal of Economic Behavior & Organization Vol. 57 (2005) 1–27 Entrepreneurship and network externalities Maria Minniti ∗ Babson College, Luksic Hall #304, Babson Park, MA 02457, USA Available online 15 December 2004 Abstract Studies on agglomeration show that economic characteristics explain only a portion of variance in entrepreneurship rates across regions. To complement these studies, I argue that entrepreneurship tends to concentrate geographically, in part, because of the social environment. I suggest that, when making decisions, individuals follow social cues and are influenced by what others have chosen, especially when facing ambiguous situations. Such influence may be described as a non-pecuniary network externality. Using a non-linear path-dependent stochastic process, I build a model of entrepreneurial dynamics showing why communities with initially similar economic characteristics may end up with different levels of entrepreneurial activity. © 2004 Elsevier B.V. All rights reserved. Keywords: Entrepreneurship; Network externalities; Path dependency 1. Introduction Why does entrepreneurship flourish in some regions and not in others that have other- wise similar conditions? Silicon Valley and Boston’s Route 128 in the U.S. and Baden- Wurttemberg and Emilia-Romagna in Europe are just a few examples showing that en- trepreneurial activity tends to cluster geographically. Traditionally, economies of scale and scope and the resulting reduction in transaction costs are identified as the main reasons for these agglomerations (Baum and Singh, 1994; Fujita et al., 1999; Fujita and Thisse, 2002; Greenhut et al., 1987; Wade, 1995). Often, however, science parks created to replicate pro- cesses observed elsewhere fail (Cˆ ot´ e, 1991; Massey et al., 1992). Also, otherwise similar ∗ Tel.: +1 781 239 4296; fax: +1 781 239 5239. E-mail address: minniti@babson.edu. 0167-2681/$ – see front matter © 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.jebo.2004.10.002