Entrepreneurs hold a significant fraction of the total wealth in the economy; they are approximately 8% of the population but hold 39% of total net worth. In this paper, we construct and solve numerically a life cycle optimization model with intergenerational transmission of bequests to study the choice of starting an entrepreneurial activity, and its effect on the wealth accumulation of entrepreneurs and on the distribution of wealth in the population. We examine two forces that determine self selection into an entrepreneurial activity: initial wealth and attitudes to risk. Starting a business requires initial funds, and entrepreneurs may have to invest part of their own wealth into the business activity. Some of this initial funds may come from parental transfers and bequests. Entrepreneurial income has higher return, but is riskier than labor income: more risk averse households may decide not to become entrepreneurs, despite the expected gains from such activity. We calibrate our model to the US economy. We find that the possibility of an entrepreneurial activity increases by 50% the fraction of wealth held by the top 1%. We also show that increasing the coefficient of risk aversion significantly decreases the percentage of entrepreneurs, and even in the absence of initial funding requirements, we cannot match the percentage of 8.6% of entrepreneurs. We also study the effects of changes in the initial funding requirements and in the degree of intergenerational altruism.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).
Related research
Keywords:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Blanchflower, David G & Oswald, Andrew J, 1998.
"What Makes an Entrepreneur?,"
Journal of Labor Economics,
University of Chicago Press, vol. 16(1), pages 26-60, January.
[Downloadable!] (restricted)
Other versions:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)