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Self-Employment Dynamics and the Returns to Entrepreneurship

Listed author(s):
  • Eleanor W. Dillon
  • Christopher T. Stanton
Registered author(s):

    Small business owners and others in self-employment have the option to transition to paid work. If there is initial uncertainty about entrepreneurial earnings, this option increases the expected lifetime value of self-employment relative to pay in a single year. This paper first documents that moves between paid work and self-employment are common and consistent with experimentation to learn about earnings. This pattern motivates estimating the expected returns to entrepreneurship within a dynamic lifecycle model that allows for non-random selection and gradual learning about the entrepreneurial earnings process. The model accurately fits entry patterns into self-employment by age. The option value of returning to paid work is found to constitute a substantial portion of the monetary value of entrepreneurship. The model is then used to evaluate policies that change incentives for entry into self-employment.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23168.

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    Date of creation: Feb 2017
    Handle: RePEc:nbr:nberwo:23168
    Note: AP CF LS PE PR
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    1. 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.
    2. Josh Lerner & Ulrike Malmendier, 2013. "With a Little Help from My (Random) Friends: Success and Failure in Post-Business School Entrepreneurship," Review of Financial Studies, Society for Financial Studies, vol. 26(10), pages 2411-2452.
    3. Joshua Gottlieb & Richard Townsend & Ting Xu, 2016. "Experimenting with Entrepreneurship: The Effect of Job-Protected Leave," Working Papers id:11142, eSocialSciences.
    4. Train,Kenneth E., 2009. "Discrete Choice Methods with Simulation," Cambridge Books, Cambridge University Press, number 9780521747387, December.
    5. Benjamin F. Jones, 2010. "Age and Great Invention," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 1-14, February.
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