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Self-Employment Dynamics and the Returns to Entrepreneurship

Author

Listed:
  • Eleanor Dillon

    (Amherst College)

  • Christopher Stanton

    (Harvard University)

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 rst documents that moves between paid work and self-employment are common and consistent with experi- mentation 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 ts 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 Dillon & Christopher Stanton, 2018. "Self-Employment Dynamics and the Returns to Entrepreneurship," 2018 Meeting Papers 1261, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:1261
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    Cited by:

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    2. Dylan Balla-Elliott & Zoë B. Cullen & Edward L. Glaeser & Michael Luca & Christopher T. Stanton, 2020. "Determinants of Small Business Reopening Decisions After COVID Restrictions Were Lifted," NBER Working Papers 27362, National Bureau of Economic Research, Inc.
    3. Michael Ewens Author-1-Name-First: Michael Author-1-Name-Last: Ewens & Ramana Nanda Author-2-Name-First: Ramana Author-2-Name-Last: Nanda & Christopher Stanton Author-3-Name-First: Christopher Author-, 2020. "Founder-CEO Compensation and Selection into Venture Capital-Backed Entrepreneurship," Harvard Business School Working Papers 20-119, Harvard Business School, revised Sep 2023.
    4. Louise Lindbjerg & Theodor Vladasel, 2021. "Hiring Entrepreneurs for Innovation," Working Papers 1309, Barcelona School of Economics.
    5. Emin M. Dinlersoz & Timothy Dunne & John Haltiwanger & Veronika Penciakova, 2023. "Local Origins of Business Formation," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2023(7), pages 1-12, November.
    6. Brück, Tilman & Mahe, Clotilde & Naudé, Wim, 2018. "Return Migration and Self-Employment: Evidence from Kyrgyzstan," IZA Discussion Papers 11332, Institute of Labor Economics (IZA).
    7. Ewens, Michael & Nanda, Ramana & Stanton, Christopher, 2020. "The Evolution of CEO Compensation in Venture Capital Backed Startups," SocArXiv rku3m, Center for Open Science.
    8. Joshua D Gottlieb & Richard R Townsend & Ting Xu, 2022. "Does Career Risk Deter Potential Entrepreneurs?," The Review of Financial Studies, Society for Financial Studies, vol. 35(9), pages 3973-4015.
    9. Felipe Balmaceda, 2018. "Entrepreneurship: skills and financing," Small Business Economics, Springer, vol. 50(4), pages 871-886, April.
    10. Catherine, Sylvain, 2022. "Keeping options open: What motivates entrepreneurs?," Journal of Financial Economics, Elsevier, vol. 144(1), pages 1-21.
    11. Matthew J. Lindquist & Theodor Vladasel, 2022. "Are Entrepreneurs More Upwardly Mobile?," Working Papers 1351, Barcelona School of Economics.
    12. Patel, Pankaj C. & Tsionas, Mike & Oghazi, Pejvak & Izquierdo, Vanessa, 2022. "No entrepreneur steps in the same river twice: Limited learning advantage for serial entrepreneurs," Journal of Business Research, Elsevier, vol. 142(C), pages 1038-1052.
    13. Shaw, Kathryn & Sørensen, Anders, 2022. "Coming of age: Watching young entrepreneurs become successful," Labour Economics, Elsevier, vol. 77(C).
    14. Joonkyu Choi, 2018. "Entrepreneurial Risk-Taking, Young Firm Dynamics, and Aggregate Implications," 2018 Meeting Papers 1018, Society for Economic Dynamics.
    15. Canidio, Andrea, 2019. "Task Discretion, Labor Market Frictions and Entrepreneurship," CEPR Discussion Papers 13954, C.E.P.R. Discussion Papers.
    16. 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.
    17. Kathryn Shaw & Anders Sørensen, 2019. "The Productivity Advantage of Serial Entrepreneurs," ILR Review, Cornell University, ILR School, vol. 72(5), pages 1225-1261, October.
    18. Gendron-Carrier, Nicolas, 2023. "Prior Work Experience and Entrepreneurship: The Careers of Young Entrepreneurs," IZA Discussion Papers 16145, Institute of Labor Economics (IZA).
    19. Aymeric Bellon & J. Anthony Cookson & Erik P. Gilje & Rawley Z. Heimer, 2020. "Personal Wealth and Self-Employment," NBER Working Papers 27452, National Bureau of Economic Research, Inc.
    20. Elizabeth Mishkin, 2021. "Gender and Sibling Dynamics in the Intergenerational Transmission of Entrepreneurship," Management Science, INFORMS, vol. 67(10), pages 6116-6135, October.
    21. Merida, Adrian L. & Rocha, Vera, 2021. "It's about time: The timing of entrepreneurial experience and the career dynamics of university graduates," Research Policy, Elsevier, vol. 50(1).
    22. Sabrina T. Howell, 2017. "Reducing Information Frictions in Venture Capital: The Role of New Venture Competitions," NBER Working Papers 23874, National Bureau of Economic Research, Inc.
    23. Panka Bencsik & Tuugi Chuluun, 2021. "Comparative well-being of the self-employed and paid employees in the USA," Small Business Economics, Springer, vol. 56(1), pages 355-384, January.
    24. Jarno Stappers & Petra Andries, 2022. "The role of distinct ADHD symptoms for pre-entry entrepreneurial behavior: when intentions do not translate into action," Small Business Economics, Springer, vol. 58(3), pages 1441-1457, March.

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    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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