It's the Opportunity Cost, stupid! How Self-Employment responds to Financial Incentives of Return, Risk and Skew

Peter Berkhout, Joop Hartog and Mirjam Praag
Additional contact information
Peter Berkhout: RIGO
Joop Hartog: University of Amsterdam

No 11-165/3, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: There is no robust empirical support for the effect of financial incentives on the decision to work in selfemploymentrather than as a wage earner. In the literature, this is seen as a puzzle. We offer a focus on theopportunity cost, i.e. the wages given up as an employee. Information on income from self-employment is ofinferior quality and this is not just a problem for the outside researcher, it is an imminent problem of theindividual considering self-employment. We also argue that it is not only the location of an incomedistribution that matters and that dispersion and (a)symmetry should not be ignored. We predict that highermean, lower variance and higher skew in the wage distribution in a particular employment segment reducethe inclination to prefer self-employment above employee status. Using a sample of 56,000 recent graduatesfrom a Dutch college or university, grouped in approximately 120 labor market segments, we find significantsupport for these propositions. The results survive various robustness checks on specifications andassumptions.

Keywords: entrepreneurship; self-employment; wage-employment; income distribution; income risk; income skew; income variance; occupational choice; labor market entry; labor market segments; opportunity cost (search for similar items in EconPapers)
JEL-codes: J24 L26 (search for similar items in EconPapers)
Date: 2011-11-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: It's the Opportunity Cost, Stupid! How Self-Employment Responds to Financial Incentives of Return, Risk and Skew (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20110165

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