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Self-Employment Dynamics and the Returns to Entrepreneurship

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  • Eleanor W. Dillon
  • Christopher T. Stanton

Abstract

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.

Suggested Citation

  • Eleanor W. Dillon & Christopher T. Stanton, 2017. "Self-Employment Dynamics and the Returns to Entrepreneurship," NBER Working Papers 23168, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23168
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    References listed on IDEAS

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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.
    5. Sarada, FNO, 2010. "The Unobserved Returns to Entrepreneurship," University of California at San Diego, Economics Working Paper Series qt04b3p1p0, Department of Economics, UC San Diego.
    6. Daly, Moira, 2015. "The long term returns of attempting self-employment with regular employment as a fall back option," Labour Economics, Elsevier, vol. 35(C), pages 26-52.
    7. Theodore Papageorgiou, 2014. "Learning Your Comparative Advantages," Review of Economic Studies, Oxford University Press, vol. 81(3), pages 1263-1295.
    8. 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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    Cited by:

    1. Brück, Tilman & Mahe, Clotilde & Naudé, Wim, 2018. "Return Migration and Self-Employment: Evidence from Kyrgyzstan," IZA Discussion Papers 11332, Institute for the Study of Labor (IZA).
    2. Joshua D. Gottlieb & Richard R. Townsend & Ting Xu, 2016. "Experimenting with Entrepreneurship: The Effect of Job-Protected Leave," NBER Working Papers 22446, National Bureau of Economic Research, Inc.
    3. 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.
    4. Kathryn L. Shaw & Anders Sørensen, 2017. "The Productivity Advantage of Serial Entrepreneurs," NBER Working Papers 23320, National Bureau of Economic Research, Inc.
    5. Sabrina T. Howell, 2017. "Learning from Feedback: Evidence from New Ventures," NBER Working Papers 23874, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M50 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - General

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