On the Nature of Entrepreneurship

This paper provides new insights into the nature of entrepreneurship using a novel panel dataset based on U.S. administrative data from the Internal Revenue Service and the Social Security Administration. These data are used to analyze patterns of income growth and determinants of entrepreneurial choice for a large population of business owners. Earlier studies relying on household survey data have been limited by small samples, short panels, and income top-coding and, as a result, have focused on the typical self-employed individual rather than the typical dollar earned in self-employment. Without these limitations, we find that self-employed individuals have significantly higher average income and steeper, more persistent income growth profiles than paid- employed peers with similar characteristics. Contrary to the survey evidence, we find a much smaller role for non-pecuniary motives in driving entrepreneurial choice and little evidence for inordinately high risk factors or startup costs impeding entry. Linking individual and business filings, we find that business founders have sufficient resources in the initial years of operation to ensure positive individual income despite the fact that most claim a loss on the business.