The surplus that is created in a successful entrepreneurial venture is much higher than the profit corresponding to the risk-adjusted market rate of return. The part of the surplus that exceeds this level may be denoted “entrepreneurial rent.” Such rents normally disappear in the long run but so-called isolating mechanisms ensure that these rents persist in the short or medium run.
Entrepreneurial rents arise when successful entrepreneurship is exercised and entrepreneurial firms create and successfully commercialize something new and unique. The presence of and search for entrepreneurial rents is a prerequisite for the innovations and structural change required to generate economic growth. High ex post compensation for successful entrepreneurship cannot be taxed harshly without affecting entrepreneurs’ willingness to supply effort.