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It's the Opportunity Cost, stupid! How Self-Employment responds to Financial Incentives of Return, Risk and Skew

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Author Info

  • Peter Berkhout

    (RIGO)

  • Joop Hartog

    (University of Amsterdam)

  • Mirjam van Praag

    (University of Amsterdam)

Abstract

There is no robust empirical support for the effect of financial incentives on the decision to work in selfemploymentrather than as a wage earner. In the literature, this is seen as a puzzle. We offer a focus on theopportunity cost, i.e. the wages given up as an employee. Information on income from self-employment is ofinferior quality and this is not just a problem for the outside researcher, it is an imminent problem of theindividual considering self-employment. We also argue that it is not only the location of an incomedistribution that matters and that dispersion and (a)symmetry should not be ignored. We predict that highermean, lower variance and higher skew in the wage distribution in a particular employment segment reducethe inclination to prefer self-employment above employee status. Using a sample of 56,000 recent graduatesfrom a Dutch college or university, grouped in approximately 120 labor market segments, we find significantsupport for these propositions. The results survive various robustness checks on specifications andassumptions.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 11-165/3.

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Date of creation: 11 Nov 2011
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Handle: RePEc:dgr:uvatin:20110165

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Web page: http://www.tinbergen.nl

Related research

Keywords: entrepreneurship; self-employment; wage-employment; income distribution; income risk; income skew; income variance; occupational choice; labor market entry; labor market segments; opportunity cost;

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  1. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
  2. Joseph Golec & Maurry Tamarkin, 1998. "Bettors Love Skewness, Not Risk, at the Horse Track," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 205-225, February.
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