Income, Uncertainty and the Probability of Self-Employment
AbstractThis paper aims at investigating the determinants of self- employment within a structural model of discrete choice under uncertainty. The basic idea of our approach centres around Knight's (1921) famous view of entrepreneurs receiving risk-adjusted income that has to exceed the income of employees because of the greater variance of the income stream. Unlike previous econometric approaches, which use reduced form specifications that are more or less based on ad-hoc reasoning, we derive a choice equation of which the parameters have a clear interpretation in terms of the parameters of the underlying von Neumann- Morgenstern utility function. The specification allows to identify how the difference in income risk between wage-employment and self- employment enters the choice equation without approximating the risk difference via a reduced form specification. The model is estimated using a random effects panel probit estimator with unrestricted autocorrelation structure. Estimates are based on a balanced panel of 1,926 working men selected from the West German Socio-Economic Panel 1984 to 1989.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (REL - Recherches Economiques de Louvain) with number 1992032.
Date of creation: 01 Sep 1992
Date of revision:
Find related papers by JEL classification:
- C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
- C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
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