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Wealth, Tastes, and Entrepreneurial Choice

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  • Erik G. Hurst
  • Benjamin W. Pugsley

Abstract

The non-pecuniary benefits of managing a small business are a first order consideration for many nascent entrepreneurs, yet the preference for business ownership is mostly ignored in models of entrepreneurship and occupational choice. In this paper, we study a population with varying entrepreneurial tastes and wealth in a simple general equilibrium model of occupational choice. This choice yields several important results: (1) entrepreneurship can be thought of as a normal good, generating wealth effects independent of financing constraints, (2) non-pecuniary entrepreneurs select into small scale firms, (3) subsidies designed to stimulate more business entry can have regressive distributional effects. Despite abstracting from other important considerations such as risk, financing constraints, and innovation, we show that non-pecuniary compensation is particularly relevant in discussions of small businesses.

Suggested Citation

  • Erik G. Hurst & Benjamin W. Pugsley, 2015. "Wealth, Tastes, and Entrepreneurial Choice," NBER Working Papers 21644, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21644
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    References listed on IDEAS

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    1. Erik Hurst & Benjamin Wild Pugsley, 2011. "What Do Small Businesses Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 73-142.
    2. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-827, August.
    3. Erik Hurst & Geng Li & Benjamin Pugsley, 2014. "Are Household Surveys Like Tax Forms? Evidence from Income Underreporting of the Self-Employed," The Review of Economics and Statistics, MIT Press, vol. 96(1), pages 19-33, March.
    4. David B. Audretsch (ed.), 2006. "Entrepreneurship, Innovation and Economic Growth," Books, Edward Elgar Publishing, number 4130.
    5. Gian Luca Clementi & Hugo A. Hopenhayn, 2006. "A Theory of Financing Constraints and Firm Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 229-265.
    6. Audretsch, David B. & Keilbach, Max C. & Lehmann, Erik E., 2006. "Entrepreneurship and Economic Growth," OUP Catalogue, Oxford University Press, number 9780195183511.
    7. Ron S Jarmin & Javier Miranda, 2002. "The Longitudinal Business Database," Working Papers 02-17, Center for Economic Studies, U.S. Census Bureau.
    8. John Haltiwanger & Ron S. Jarmin & Javier Miranda, 2013. "Who Creates Jobs? Small versus Large versus Young," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 347-361, May.
    9. 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.
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    Citations

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    Cited by:

    1. J. David Brown & John S. Earle & Mee Jung Kim & Kyung Min Lee, 2017. "High-Growth Entrepreneurship," Working Papers 17-53, Center for Economic Studies, U.S. Census Bureau.
    2. Decker, Ryan A. & Haltiwanger, John & Jarmin, Ron S. & Miranda, Javier, 2016. "Where has all the skewness gone? The decline in high-growth (young) firms in the U.S," European Economic Review, Elsevier, vol. 86(C), pages 4-23.
    3. McCain, Roger, 2016. "Small Business and Liquidity Constraint," School of Economics Working Paper Series 2016-3, LeBow College of Business, Drexel University.
    4. Bergner, Sören Martin & Bräutigam, Rainer & Evers, Maria Theresia & Spengel, Christoph, 2017. "The use of SME tax incentives in the European Union," ZEW Discussion Papers 17-006, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    5. Jones, John Bailey & Pratap, Sangeeta, 2017. "An Estimated Structural Model of Entrepreneurial Behavior," Working Paper 17-7, Federal Reserve Bank of Richmond.
    6. Sari Pekkala Kerr & William R. Kerr & Tina Xu, 2017. "Personality Traits of Entrepreneurs: A Review of Recent Literature," NBER Working Papers 24097, National Bureau of Economic Research, Inc.
    7. Sabrina T. Howell, 2017. "Are New Venture Competitions Useful?," NBER Working Papers 23874, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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