Abstract
A modified version of Lazear’s model (in American Economic Review, 94, 208-211, 2004, Journal of Labor Economics, 23, 649–680, 2005) for occupational choice is formulated. It includes a utility adjustment factor that captures the combined effect of nonpecuniary benefits and uncertainty associated with entrepreneurship. We show that the counterfactual income returns to entrepreneurship are lower than the market value of entrepreneurial talent and higher than the inverse of the utility adjustment factor. Moreover, if the skill profiles in the population are Fréchet-distributed, the ratio between the expected incomes of entrepreneurs and observationally similar wage employees is lower than the inverse of the utility adjustment factor. Thus, entrepreneurs will on average earn less than wage employees if the utility adjustment factor is greater than or equal to one. It is also shown that the self-selection bias related to this income ratio or returns measure increases with the observed percentage of entrepreneurs. Swedish employment data are used to calibrate the modified Lazear model. The empirical results indicate that uncertainty considerations might be more important for the occupational choices than nonpecuniary benefits.
Highlights
This paper analyzes the returns to entrepreneurship by applying a utility-based version of Lazear’s (2002, 2004, 2005) occupational choice model
The counterfactual income returns to selfemployment as well as to wage employment are positive among all subgroups but “all self-employed electrical engineers”—their returns being 2% lower than if they had instead chosen wage employment
The hypothesis, suggested by Proposition 1, that the counterfactual income returns to entrepreneurship μE should be very close to the averages of the corresponding values of λ and 1/s, is empirically verified
Summary
This paper analyzes the returns to entrepreneurship by applying a utility-based version of Lazear’s (2002, 2004, 2005) occupational choice model. The modified model allows income uncertainty and nonpecuniary benefits associated with entrepreneurship to influence the occupational choice. In Lazear’s original model, the individuals have two basic skills, and their choices between entrepreneurship and wage employment are determined by the resulting incomes. Income maximization implies that individuals having balanced skills are more likely than others to become entrepreneurs. Most of them seem to support the implication that entrepreneurs have more balanced skills than wage employees; see Lazear (2004, 2005), Wagner (2003, 2006), Cho and Orazem (2014), Bublitz and Noseleit (2014), Tegtmeier et al
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