Working Paper: NBER ID: w23168
Authors: Eleanor W. Dillon; Christopher T. Stanton
Abstract: Small business owners and others in self-employment have the option to transition to paid work. If there is initial uncertainty about entrepreneurial earnings, this option increases the expected lifetime value of self-employment relative to pay in a single year. This paper first documents that moves between paid work and self-employment are common and consistent with experimentation to learn about earnings. This pattern motivates estimating the expected returns to entrepreneurship within a dynamic lifecycle model that allows for non-random selection and gradual learning about the entrepreneurial earnings process. The model accurately fits entry patterns into self-employment by age. The option value of returning to paid work is found to constitute a substantial portion of the monetary value of entrepreneurship. The model is then used to evaluate policies that change incentives for entry into self-employment.
Keywords: self-employment; entrepreneurship; lifecycle model; returns to entrepreneurship; policy implications
JEL Codes: J24; J31; J62; L26; M50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| The option to transition from self-employment to paid work (J62) | expected lifetime value of self-employment (J17) |
| The option value of returning to paid work (J29) | substantial portion of monetary value in entrepreneurship (L26) |
| Policies that incentivize entry into self-employment (J68) | improve sorting based on comparative advantage (F12) |