Exploring the U-shaped relationship between education and entrepreneurial choice: a theoretical model and empirical findings for Latin America

This paper explores the relationship between entrepreneurship and education. We explore whether more educated or less educated people are more likely to become entrepreneurs. To respond to this, we proposed a model of entrepreneurial choice considering the individual’s ability and preference for risk. Our model sheds light on the empirical fact that this relationship is U-shaped; i.e., people with low or high levels of education are more likely to be entrepreneurs than people with intermediate levels of education. Our model also allows us to explain that some individuals would always choose to be self-employed no matter the risk involved in entrepreneurship. We also provide evidence for Latin America using the Banco de Desarrollo de América Latina (CAF) entrepreneur’s database. We perform an instrumental variable approach, and we find that this U-shape is only visible for a type of entrepreneur known as an opportunity entrepreneur. This result suggests the type of entrepreneur is an important characteristic to be included in our model in the future.