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Income, Uncertainty and the Probability of Self-Employment

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  • Friedhelm PFEIFFER

    (Universität Mannheim)

  • Winfried POHLMEIER

    (Universität Mannheim)

Abstract

This 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 Info

Paper 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.

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Length: 18
Date of creation: 01 Sep 1992
Date of revision:
Handle: RePEc:ctl:louvre:1992032

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Cited by:
  1. Pfeiffer, Friedhelm & Reize, Frank, 2000. "Business start-ups by the unemployed -- an econometric analysis based on firm data," Labour Economics, Elsevier, vol. 7(5), pages 629-663, September.
  2. Pfeiffer, Friedhelm, 2005. "Existenzgründungen: Ein Weg zur Beschäftigungsförderung? (Firm foundation * a way to enhance employment?)," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 38(2/3), pages 325-340.
  3. Glocker, Daniela & Steiner, Viktor, 2007. "Self-Employment: A Way to End Unemployment? Empirical Evidence from German Pseudo-Panel Data," IZA Discussion Papers 2561, Institute for the Study of Labor (IZA).
  4. Frank M. Fossen, 2007. "Risky Earnings, Taxation and Entrepreneurial Choice: A Microeconometric Model for Germany," Discussion Papers of DIW Berlin 705, DIW Berlin, German Institute for Economic Research.
  5. repec:iab:iabzaf:v:38:i:2/3:p:325-340 is not listed on IDEAS
  6. repec:iab:iabmit:v:32:i:3:p:300-330 is not listed on IDEAS
  7. Das, J.W.M. & Soest, A.H.O. van, 1996. "A Panel Data Model for Subjective Information on Household Income Growth," Discussion Paper 1996-75, Tilburg University, Center for Economic Research.
  8. Lechner, Michael, 1993. "The dynamics of self-employment in East Germany: an empirical analysis using panel data and allowing for state dependence and endogenous attrition," ZEW Discussion Papers 93-24, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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