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Resolving the entrepreneurship puzzle: Applying Fréchet distributions to Lazear’s occupational choice model

Author

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  • Hårsman, Björn

    (CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology)

  • Mattsson, Lars-Göran

    (Royal Institute of Technology, Department of Transport Science)

Abstract

The paper analyzes the selection into entrepreneurship. We show that Lazear’s (2004, 2005) model of occupational choice between entrepreneurship and wage employment is compatible with a lower average income for entrepreneurs than for age ployed. The key assumption behind this result is that the skill profiles in a population follow a Fréchet distribution. Thus, under this skill distribution, there is no “returns-to-entrepreneurship puzzle”. Using individual-based data from the Swedish employment register for 2004-8, we investigate empirical implications of our specification of the Lazear model. The results show that our assumption is reasonably well supported.

Suggested Citation

  • Hårsman, Björn & Mattsson, Lars-Göran, 2017. "Resolving the entrepreneurship puzzle: Applying Fréchet distributions to Lazear’s occupational choice model," Working Paper Series in Economics and Institutions of Innovation 458, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies, revised 22 Feb 2018.
    • Handle: RePEc:hhs:cesisp:0458
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    References listed on IDEAS

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    1. Joachim Wagner, 2006. "Are nascent entrepreneurs 'Jacks-of-all-trades'? A test of Lazear's theory of entrepreneurship with German data," Applied Economics, Taylor & Francis Journals, vol. 38(20), pages 2415-2419.
    2. Joop Hartog & Mirjam Van Praag & Justin Van Der Sluis, 2010. "If You Are So Smart, Why Aren't You an Entrepreneur? Returns to Cognitive and Social Ability: Entrepreneurs Versus Employees," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(4), pages 947-989, December.
    3. Edward P. Lazear, 2004. "Balanced Skills and Entrepreneurship," American Economic Review, American Economic Association, vol. 94(2), pages 208-211, May.
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    5. Parker,Simon C., 2009. "The Economics of Entrepreneurship," Cambridge Books, Cambridge University Press, number 9780521728355, March.
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    9. Daniel Lechmann & Claus Schnabel, 2014. "Are the self-employed really jacks-of-all-trades? Testing the assumptions and implications of Lazear’s theory of entrepreneurship with German data," Small Business Economics, Springer, vol. 42(1), pages 59-76, January.
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    12. Daghbashyan, Zara & Hårsman, Björn, 2012. "Entrepreneurship and Arts Related Education," Working Paper Series in Economics and Institutions of Innovation 295, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    13. Mattsson, Lars-Göran & Weibull, Jörgen W. & Lindberg, Per Olov, 2014. "Extreme values, invariance and choice probabilities," Transportation Research Part B: Methodological, Elsevier, vol. 59(C), pages 81-95.
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    Cited by:

    1. Björn Hårsman & Lars-Göran Mattsson & Vardan Hovsepyan, 2018. "The income return to entrepreneurship: theoretical model and outcomes for Swedish regions," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 61(3), pages 479-498, November.

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    More about this item

    Keywords

    entrepreneurship; occupational choice; self-owning; skill distribution; Fréchet distribution; entrepreneurship puzzle;
    All these keywords.

    JEL classification:

    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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