Drug Dealing and Legitimate Self-Employment

Theoretical models of self-employment posit that attitudes toward risk, entrepreneurial ability, and preferences for autonomy are central to the individual's decision between self-employment and wage/salary work. None of the studies in the rapidly growing empirical literature on self-employment, however, have been able to test whether these factors are important determinants of self-employment. The author explores this hypothesis by examining the relationship between drug dealing and legitimate self-employment. A review of ethnographic studies in the criminology literature indicates that drug dealing represents a good proxy for low risk aversion, entrepreneurial ability, and a preference for autonomy. The 1980 wave of the National Longitudinal Survey of Youth (NLSY) contained a special section on participation in illegal activities, including questions on selling marijuana and other "hard" drugs. The author uses answers to these questions and data from subsequent years of the NLSY to examine the relationship between drug dealing and legitimate self-employment in later years. Using various definitions of drug dealing and specifications of the econometric model, the author finds that drug dealers are 11 to 21 percent more likely to choose self-employment than non drug dealers, all else equal. The author also finds that drug dealers who sold more frequently, used drugs less frequently, or reported receiving income from drug dealing are more likely to choose self-employment than other drug dealers. The author interprets these results as providing evidence that low risk aversion, entrepreneurial ability, and a preference for autonomy are important determinants of self-employment. The author also provides evidence against a few alternative explanations of the positive relationship between drug dealing and self-employment.