Inferring the unobserved human capital of entrepreneurs
The goal of this paper is to study the role of unobserved human capital in entrepreneurial choice and its impact on the survival of newly created firms. Our starting point is that, when starting a new business, an entrepreneur’s labor market situation (e.g. employed or not) reflects how his human capital may be valuated through salaried labor. This in turn affects the entrepreneurial decision so that, an entrepreneur’s human capital should be correlated with the state at which he decided to start a new firm. We illustrate this point with descriptive statistics computed from a survey of French startups. These statistics show that the impact of education on the new firm’s survival is most pronounced for firms created by individuals salaried in their preferred branch of activity while it is rather limited if the entrepreneur was in the wrong branch or newly unemployed. In this paper we argue, both theoretically and empirically, that these results may be explained by some unobserved heterogeneity in the entrepreneur’s human capital that is correlated both with the initial labor market situation and with some observable measures of human capital such as education or experience. We first present a simple model of entrepreneurial choice that provides predictions about an entrepreneur’s actual human capital as a function of human capital observed by the econometrician as well as the individual’s state in the labor market when the firm was created. The model allows for some information asymmetry on the labor market as well as other sources of inefficiencies such as incentive problems due to moral hazard. It also allows in a simple way for some dynamic considerations on the part of the entrepreneur regarding potential depreciation of his human capital. We argue that the data may be best explained by a model where employer’s information on employee’s human capital is sufficiently poor and where there is a strong concern about human capital depreciation for those with a high level of observed human capital. We then run some duration analysis on our data on new firms’ survival by estimating a proportional hazard Cox model with partial maximum likelihood. The estimation results are coherent with the descriptive statistics on the impact of education on survival for different initial states of the entrepreneur. This econometric analysis will be completed with additional regressions that allow for correcting for unobserved heterogeneity in order to evaluate its magnitude and nature. We have done some preliminary work where unobserved heterogeneity is modelled through random effects (frailties) for different subgroups of individuals according to education level and experience that have a gamma distribution. Our preliminary results show that there is significant unobserved heterogeneity but the estimates of the frailties are consistent with the results obtained by running a standard Cox estimation.
|Date of creation:||2006|
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- Niels Bosma & Mirjam van Praag & Roy Thurik & Gerrit de Wit, 2004.
"The Value of Human and Social Capital Investments for the Business Performance of Startups,"
Small Business Economics,
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- Niels Bosma & Mirjam van Praag & Roy Thurik & Gerrit de Wit, 2002. "The Value of Human and Social Capital Investments for the Business Performance of Start-ups," Tinbergen Institute Discussion Papers 02-027/3, Tinbergen Institute.
- Gerrit de Wit & Niels Bosma & Roy Thurik & Mirjam van Praag, 2002. "The Value of Human and Social Capital Investments for the Business Performance of Startups," Scales Research Reports N200204, EIM Business and Policy Research.
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- Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc.
- Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
- Rafik Abdesselam & Jean Bonnet & Nicolas Le Pape, 2004. "An Explanation of the Life Span of New French Firms," Small Business Economics, Springer, vol. 23(3), pages 237-254, October.
- Rafik Abdesselam & Jean Bonnet & Nicolas Le Pape, 2004. "An Explanation of the Life Span of New French Firms," Post-Print hal-00149371, HAL.
- Steven Stern, 1990. "The Effects of Firm Optimizing Behaviour in Matching Models," Review of Economic Studies, Oxford University Press, vol. 57(4), pages 647-660.
- Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
- Fonseca, Raquel & Lopez-Garcia, Paloma & Pissarides, Christopher A., 2001. "Entrepreneurship, start-up costs and employment," European Economic Review, Elsevier, vol. 45(4-6), pages 692-705, May.
- Bates, Timothy, 1990. "Entrepreneur Human Capital Inputs and Small Business Longevity," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 551-559, November. Full references (including those not matched with items on IDEAS)
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