Does rural entrepreneurship pay?

Abstract

This paper investigates entrepreneurship and location choices among college-educated individuals in the USA and the role of location-specific human capital in these choices. We model the location and entrepreneurship decisions jointly, demonstrating that individuals who choose a rural residence are more likely to become entrepreneurs when compared to their urban peers. We then explore whether, all else equal, the entrepreneurship choice of rural alumni lowers earnings, consistent with the story of business location choice being motivated by the entrepreneurs’ preference for a rural lifestyle, whether there is evidence that the location choice is productive, or whether rural residents are pushed to start a business due to thin labor markets. After controlling for selection, rural entrepreneurs earn significantly more than rural workers but still less than urban entrepreneurs, lending support to the notion that rural entrepreneurs’ location choices are productive and rural entrepreneurs have stronger location preference. An Oaxaca decomposition of the earnings gap across subsamples reveals the returns to entrepreneurial skills are much lower in rural areas; however, the earnings gap between rural and urban entrepreneurs is at least partially offset by positive self-selection into a rural area. This finding lends support to “grow your own” business development strategies for rural regions.