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Risk Attitudes and Private Business Equity

  • Frank M. Fossen

Why do people engage in entrepreneurship and commit large parts of their personal wealth to their business, despite comparably low returns and high risk? This paper connects several streams of literature to shed some light on this puzzle and suggests possible future research avenues. Key insights from the literature are that entrepreneurs may operate in imperfect financial markets and that entrepreneurs are less risk-averse than the rest of the population. A focus of this paper is, therefore, on the role of heterogeneous risk attitudes in entrepreneurial decisions, specifically portfolio choice and the entry and exit decisions. Nonpecuniary benefits of entrepreneurship, such as being independent in the workplace, also contribute to an explanation of entrepreneurial behavior.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.398515.de/dp1209.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 1209.

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Length: 33 p.
Date of creation: 2012
Date of revision:
Handle: RePEc:diw:diwwpp:dp1209
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  1. Marco Caliendo & Frank M. Fossen & Alexander S. Kritikos, 2006. "Risk Attitudes of Nascent Entrepreneurs: New Evidence from an Experimentally-Validated Survey," Discussion Papers of DIW Berlin 600, DIW Berlin, German Institute for Economic Research.
  2. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1994. "Entrepreneurial Decisions and Liquidity Constraints," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 334-347, Summer.
  3. Marianne P. Bitler & Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2005. "Testing Agency Theory with Entrepreneur Effort and Wealth," Journal of Finance, American Finance Association, vol. 60(2), pages 539-576, 04.
  4. van Praag, C M & Cramer, J S, 2001. "The Roots of Entrepreneurship and Labour Demand: Individual Ability and Low Risk Aversion," Economica, London School of Economics and Political Science, vol. 68(269), pages 45-62, February.
  5. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
  6. Nicola Fuchs-Schuendeln, 2008. "On Preferences for Being Self-Employed," 2008 Meeting Papers 634, Society for Economic Dynamics.
  7. Disney, Richard & Gathergood, John, 2009. "Housing wealth, liquidity constraints and self-employment," Labour Economics, Elsevier, vol. 16(1), pages 79-88, January.
  8. Cramer, J. S. & Hartog, J. & Jonker, N. & Van Praag, C. M., 2002. "Low risk aversion encourages the choice for entrepreneurship: an empirical test of a truism," Journal of Economic Behavior & Organization, Elsevier, vol. 48(1), pages 29-36, May.
  9. Cressy, Robert, 2000. "Credit rationing or entrepreneurial risk aversion? An alternative explanation for the Evans and Jovanovic finding," Economics Letters, Elsevier, vol. 66(2), pages 235-240, February.
  10. John Y. Campbell & Martin Lettau & Burton G. Malkiel & Yexiao Xu, 2000. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," NBER Working Papers 7590, National Bureau of Economic Research, Inc.
  11. Frank M. Fossen, 2009. "Would a Flat-Rate Tax Stimulate Entrepreneurship in Germany? A Behavioural Microsimulation Analysis Allowing for Risk," Fiscal Studies, Institute for Fiscal Studies, vol. 30(2), pages 179-218, 06.
  12. Marco Caliendo & Frank Fossen & Alexander S. Kritikos, 2008. "The Impact of Risk Attitudes on Entrepreneurial Survival," Working Papers 012, Hanseatic University, Germany, Department of Economics.
  13. William M. Gentry & R. Glenn Hubbard, 2004. ""Success Taxes," Entrepreneurial Entry, and Innovation," NBER Working Papers 10551, National Bureau of Economic Research, Inc.
  14. Bruce, Donald, 2000. "Effects of the United States tax system on transitions into self-employment," Labour Economics, Elsevier, vol. 7(5), pages 545-574, September.
  15. Herb J. Schuetze, . "Taxes, Economic Conditions And Recent Trends in Male Self-Employment: A Canada-U.S. Comparison," Canadian International Labour Network Working Papers 11, McMaster University.
  16. Hintermaier, Thomas & Steinberger, Thomas, 2005. "Occupational choice and the private equity premium puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 29(10), pages 1765-1783, October.
  17. Valery Polkovnichenko, 2003. "Human Capital and the Private Equity Premium," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 831-845, October.
  18. Marco Cagetti & Mariacristina De Nardi, 2006. "Taxation, entrepreneurship, and wealth," Working Paper Series WP-06-07, Federal Reserve Bank of Chicago.
  19. Galina Vereshchagina & Hugo A. Hopenhayn, 2009. "Risk Taking by Entrepreneurs," American Economic Review, American Economic Association, vol. 99(5), pages 1808-30, December.
  20. Fossen, Frank M. & Steiner, Viktor, 2006. "Income Taxes and Entrepreneurial Choice: Empirical Evidence from Germany," IZA Discussion Papers 2164, Institute for the Study of Labor (IZA).
  21. Philipp Köllinger & Maria Minniti & Christian Schade, 2005. ""I Think I Can, I Think I Can": Overconfidence and Entrepreneurial Behavior," Discussion Papers of DIW Berlin 501, DIW Berlin, German Institute for Economic Research.
  22. 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.
  23. Blanchflower, D.G. & Oswald, A., 1991. "What Makes an Entrepreneur?," Economics Series Working Papers 99125, University of Oxford, Department of Economics.
  24. R. Glenn Hubbard & William M. Gentry, 2000. "Tax Policy and Entrepreneurial Entry," American Economic Review, American Economic Association, vol. 90(2), pages 283-287, May.
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