Entrepreneurial earnings and entrepreneurial choice in a search and matching model of the labor market

Abstract

Empirical studies show that the monetary returns of entrepreneurship are not high and thus they cannot be the driving force of the individual's decision to start a business. However, it turns out that the entrepreneurial earnings are not low when using a stricter definition of entrepreneurship that rules out the so-called ‘necessity’ or defensive entrepreneurs, thus considering only the ‘offensive’ or bona fide entrepreneurs. Nevertheless, this seemingly straightforward approach may be wrongful, since the benefits that push an individual to become an entrepreneur are both monetary and non-monetary. In order to examine how the entrepreneurial gains affect the choice of entrepreneurship, this theoretical paper develops an extended version of the benchmark macroeconomic model of the labor market (namely, the search and matching model) that incorporates the notions of offensive and defensive entrepreneurs, and distinguishes between the value of an existing firm and the value of a new business. The main result of this paper is that the offensive entrepreneurs are cleverer in the development or management of incumbent firms, while the defensive entrepreneurs could be equally as clever as the offensive entrepreneurs in the creation of new firms.