Analyzing the returns to entrepreneurship by a modified Lazear model

Björn Hårsman () and Lars-Göran Mattsson
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Björn Hårsman: KTH Royal Institute of Technology

Small Business Economics, 2021, vol. 57, issue 4, No 14, 1875-1892

Abstract: Abstract A modified version of Lazear’s model (in American Economic Review, 94, 208-211, 2004, Journal of Labor Economics, 23, 649–680, 2005) for occupational choice is formulated. It includes a utility adjustment factor that captures the combined effect of nonpecuniary benefits and uncertainty associated with entrepreneurship. We show that the counterfactual income returns to entrepreneurship are lower than the market value of entrepreneurial talent and higher than the inverse of the utility adjustment factor. Moreover, if the skill profiles in the population are Fréchet-distributed, the ratio between the expected incomes of entrepreneurs and observationally similar wage employees is lower than the inverse of the utility adjustment factor. Thus, entrepreneurs will on average earn less than wage employees if the utility adjustment factor is greater than or equal to one. It is also shown that the self-selection bias related to this income ratio or returns measure increases with the observed percentage of entrepreneurs. Swedish employment data are used to calibrate the modified Lazear model. The empirical results indicate that uncertainty considerations might be more important for the occupational choices than nonpecuniary benefits.

Keywords: Returns to entrepreneurship; Occupational choice; Nonpecuniary benefits; Self-employment; Self-selection; Fréchet distribution; Uncertainty; Risk; M13; J24; J3; L26 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11187-020-00377-1

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