Shooting stars? Uncertainty in hiring entrepreneurs

Abstract

AbstractResearch SummaryThis article advances a theory to explain why a spell of entrepreneurship affects the future wages of entrepreneurs returning to the wage sector. We propose that entrepreneurship holds a low rather than a negative information value, increasing the uncertainty around a job applicant's future productivity. Employers respond to this uncertainty by discounting the offered wage. The theory predicts that uncertainty in hiring—and thus the wage penalty—is more pronounced for entrepreneurs (a) who were in the upper tail of the wage distribution before the entrepreneurial spell, (b) who exited entrepreneurship quickly, and (c) who are hired by small employers. We test and find empirical support for these predictions using a novel dataset of matched entrepreneurs and employees from Belgium.Managerial SummaryWe investigate the effect of past entrepreneurial experience on the future wages of entrepreneurs who go back to paid employment. We propose that former entrepreneurs receive a pay cut because employers consider them as risky hires. In line with our theory, we find that former entrepreneurs are penalized the most (a) if they were highly paid employees before becoming founders, (b) if they were entrepreneurs only for a few years, (c) and if they are hired by small employers. Our findings caution star employees from experimenting with an entrepreneurial career, as failing fast is costly. Moreover, we suggest that firms value probationary contracts to lower the risk of hiring entrepreneurs while learning about their skills.