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Drug Dealing and Legitimate Self-Employment

  • Fairlie, Robert

Theoretical models of entrepreneurship posit that attitudes toward risk, entrepreneurial ability, and preferences for autonomy are central to the individual's decision between self-employment and wage/salary work. None of the studies in the rapidly growing empirical literature on entrepreneurship, however, have been able to test whether these factors are important determinants of self-employment. I provide indirect evidence on this hypothesis by examining the relationship between drug dealing and legitimate self-employment. A review of ethnographic studies in the criminology literature indicates that drug dealing may represent a useful proxy for low risk aversion, entrepreneurial ability, and a preference for autonomy.            The 1980 wave of the National Longitudinal Survey of Youth (NLSY) contained a special section on participation in illegal activities, including questions on selling marijuana and other "hard" drugs. I use the answers to these questions and data from subsequent years of the NLSY to examine the relationship between drug dealing as a youth and legitimate self-employment in later years. Using various definitions of drug dealing and specifications of the econometric model, I find that drug dealers are 11 to 21 percent more likely to choose self-employment than non drug dealers, all else equal. I also find that drug dealers who sold more frequently, used drugs less frequently, or reported receiving income from drug dealing are more likely to choose self-employment than other drug dealers. After ruling out a few alternative explanations, I interpret these results as providing indirect evidence that risk aversion, entrepreneurial ability, and preferences for autonomy are important determinants of self-employment. Theoretical models of entrepreneurship posit that attitudes toward risk, entrepreneurial ability, and preferences for autonomy are central to the individual's decision between self-employment and wage/salary work. None of the studies in the rapidly growing empirical literature on entrepreneurship, however, have been able to test whether these factors are important determinants of self-employment. I provide indirect evidence on this hypothesis by examining the relationship between drug dealing and legitimate self-employment. A review of ethnographic studies in the criminology literature indicates that drug dealing may represent a useful proxy for low risk aversion, entrepreneurial ability, and a preference for autonomy.            The 1980 wave of the National Longitudinal Survey of Youth (NLSY) contained a special section on participation in illegal activities, including questions on selling marijuana and other "hard" drugs. I use the answers to these questions and data from subsequent years of the NLSY to examine the relationship between drug dealing as a youth and legitimate self-employment in later years. Using various definitions of drug dealing and specifications of the econometric model, I find that drug dealers are 11 to 21 percent more likely to choose self-employment than non drug dealers, all else equal. I also find that drug dealers who sold more frequently, used drugs less frequently, or reported receiving income from drug dealing are more likely to choose self-employment than other drug dealers. After ruling out a few alternative explanations, I interpret these results as providing indirect evidence that risk aversion, entrepreneurial ability, and preferences for autonomy are important determinants of self-employment.

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Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt3p38k7c8.

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Date of creation: 15 May 2014
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Handle: RePEc:cdl:ucscec:qt3p38k7c8
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