Entrepreneurial Dynamics and the Small-Firm Effect

Barton H. Hamilton, Andrés Hincapié and Mostafa Salari

Journal of Human Capital, 2026, vol. 20, issue 1, 100 - 149

Abstract: Small-firm workers are almost three times as likely to become self-employed as large-firm workers, and the self-employed are twice as likely to transition into small versus large firms. What explains these unbalanced dynamics? Using Australian data (2001–19), we estimate a dynamic structural model that captures the role of human capital and its transferability across sectors, discovering one’s sector-specific abilities, and nonpecuniary motivations. We find that the main drivers explaining the differential transitions into and out of self-employment from small firms are the favorable returns and transferability of large-firm experience and the higher switching costs associated with moving between small firms and self-employment.

Date: 2026
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