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Reconsidering the returns to entrepreneurship: Applying a modified version of Lazear’s occupational choice model

Author

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  • Hårsman, Björn

    (Department of Industrial Economics and Management, KTH Royal Institute of Technology)

  • Mattsson, Lars-Göran

    (Department of Civil and Architectural Engineering, KTH Royal Institute of Technology)

Abstract

The paper analyzes a modified version of Lazear’s (2004, 2005) model for occupational choice that includes a utility adjustment factor reflecting non-pecuniary net benefits associated with entrepreneurship. The model is used to derive analytical expressions for the relative income returns to entrepreneurship defined in two ways: in relation to the incomes of observationally similar wage employed and in relation to the counterfactual incomes of entrepreneurs as wage employed. The analysis shows that the upper bound on the income returns defined in counterfactual terms increases with the market value of entrepreneurial talent and that the lower bound decreases with increasing non-pecuniary benefits. If the entrepreneurial incomes are instead related to the incomes of observationally similar wage employed, and if the skill profiles in the population are assumed to follow a Fréchet distribution, then the upper bound on the relative expected returns will decrease with increasing non-pecuniary benefits. We also show that entrepreneurs on average will earn less than observationally similar wage employed even if there are no net benefits and that the associated self-selection bias will increase the higher the fraction of entrepreneurs. Individual-based data from the Swedish employment register is used to calibrate the parameters of the modified Lazear model and to compute the income returns to entrepreneurship. The model-based income distributions for entrepreneurs and wage employed are consistent with the observed distributions.

Suggested Citation

  • Hårsman, Björn & Mattsson, Lars-Göran, 2019. "Reconsidering the returns to entrepreneurship: Applying a modified version of Lazear’s occupational choice model," Working Paper Series in Economics and Institutions of Innovation 478, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  • Handle: RePEc:hhs:cesisp:0478
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    References listed on IDEAS

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    More about this item

    Keywords

    entrepreneurship; occupational choice; self-employment; self-selection bias; skill distribution; Fréchet distribution; entrepreneurship puzzle; returns to entrepreneurship;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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