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Entrepreneurial Tail Risk: Implications for Employment Dynamics

Thorsten Drautzburg

No 963, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Starting a new business is risky. This paper asks how entrepreneurial productivity risk has changed over time in the US and how this has affected employment. I estimate this risk using micro data on the size distribution of new businesses and their exit rates. The paper distinguishes upside and downside risk and analyzes their effects in a tractable dynamic general equilibrium model of entrepreneurship. At the heart of the model is the decision of potential entrepreneurs whether to start a new business in the face of uninsurable productivity risk. Applied to US time series data, structural estimates suggest that higher upside risk explains much of the high job creation in the late 1990s. Over the entire sample period, time variation in risk explains 40-55% of the variation in employment of new businesses. Reduced form results show that this relationship is strongest in IT-related industries. Counterfactual simulations show that the explanatory power of a model with a single risk factor drops by 30-50% compared to the baseline estimates.

Date: 2013
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Journal Article: Entrepreneurial tail risk: Implications for employment dynamics (2019) Downloads
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