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The properties of income risk in privately held businesses

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  • Jason DeBacker
  • Bradley Heim
  • Vasia Panousi
  • Shanthi Ramnath
  • Ivan Vidangos

Abstract

Our paper represents the first attempt in the literature to estimate the properties of business income risk from privately held businesses in the US. Using a new, large, and confidential panel of US income tax returns for the period 1987-2009, we extensively document the empirical stylized facts about the evolution of various business income risk measures over time. We find that business income is much riskier than labor income, not only because of the probability of business exit, but also because of higher income fluctuations, conditional on no exit. We show that business income is less persistent, but is also characterized by higher probabilities of extreme upward transition, compared to labor income. Furthermore, the distribution of percent changes for business income is more dispersed than that for labor income, and it also indicates that business income faces substantially higher tail risks. Our results suggest that the high-income households are more likely to bear both the big positive and the big negative business income percent changes.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-69.

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Date of creation: 2012
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Handle: RePEc:fip:fedgfe:2012-69

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Cited by:
  1. Thorsten Drautzburg, 2013. "Entrepreneurial tail risk: implications for employment dynamics," Working Papers 13-45, Federal Reserve Bank of Philadelphia.
  2. Monica Garcia-Perez & Christopher Goetz & John Haltiwanger & Kristin Sandusky, 2013. "Don't Quit Your Day Job: Using Wage and Salary Earnings to Support a New Business," Working Papers 13-45, Center for Economic Studies, U.S. Census Bureau.

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