Parental Business Ownership and Their Children’s Miscalibration of Entrepreneurial Returns and Entry

Abstract

There is increasing interest in why some individuals pursue entrepreneurship or self-employment. Yet, recent empirical work demonstrates that, on average, entrepreneurs and the self-employed earn less than paid-wage laborers, and are considerably less likely to have healthcare or a pension plan. This implies that working for oneself generally entails a total compensation discount vis-à-vis working for someone else. Two streams of research might explain this puzzle. One stream has to do with specific elements of social structure, including parental business ownership and the non-pecuniary benefits it provides progeny. A second stream concerns information processing biases that result in suboptimal choices. These two literatures have yet to engage with each other. Yet, there is good reason to believe that there are insights to be gleaned at their confluence. This follows because the children of business owners have a unique opportunity to calibrate their expectations about returns to working for oneself by observing or speaking with their parents. Representative, longitudinal data of young adults in the United States spanning 12-years are used, which include measures of parental business ownership, and a host of sociological, economic, and psychological factors implicated in prior entrepreneurial choice models. Across numerous model specifications, I find that miscalibrated earnings estimates increase the probability that young adults will become self-employed. This result is driven primarily by the right-tail of the distribution. Findings also corroborate prior research that shows that having a parent who was a business owner increases the likelihood of transitioning to self-employment. A novel finding arises when looking at the interaction of these two effects. For male respondents exhibiting particularly high levels of miscalibration, having a parent who is a business owner substantially reduces this effects. This finding suggests that the earnings miscalibration that compels some to pursue self-employment results, in part, from limited or poor information about its likely nature and/or returns.