Does Career Risk Deter Potential Entrepreneurs?

Abstract

Do potential entrepreneurs remain in wage employment because of concerns that they will face worse job opportunities should their entrepreneurial ventures fail? Using a Canadian reform that extends job-protected leave to one year for women giving birth after a cutoff date, we study whether the option to return to a previous job increases entrepreneurship. A regression discontinuity design reveals that a longer job-protected leave increases entrepreneurship by 1.9 percentage points. These entrepreneurs start incorporated businesses that hire employees, in industries in which experimentation before entry has low costs and high benefits.

Launching with a Parachute: The Gig Economy and New Business Formation

“…As noted by Manso (2011Manso ( , 2016, tolerance for failure is a key driver of entrepreneurial entry; here, the gig economy provides the safety net that makes experimentation "safe" to explore. Our findings are consistent with those found in other contexts and countries when liquidity or credit constraints are relaxed, job protection is extended, or income fallbacks are provided: for example, Jensen et al (2014) show that a Danish mortgage reform that increases credit by $30K leads to an increase in entry, while Gottlieb et al (2018) show that extended job-protected maternity leave in Canada increases the likelihood of entry, Bellon et al (2019) show that personal wealth windfalls from fracking increase entry into self-employment, and Hombert et al (2020) show that provision of unemployment insurance to those entering into entrepreneurship increases new business formation. More broadly, our paper relates to a growing literature on entrepreneurial entry barriers, including personal wealth, government regulation, tax policy, and banking systems (see e.g., Evans and Jovanovic, 1989;Gentry and Hubbard, 2000;Hurst and Lusardi, 2004;Klapper et al, 2006;Cagetti and de Nardi, 2006;Aghion et al, 2007, and many more).…”

“…Because the capital markets provide too little capital to entrepreneurs as a result of moral hazard and adverse selection problems (e.g., LeRoy and Singell 1987), entrepreneurs must finance themselves and bear the risk of failure. Empirical research on the relationships between wealth constraints and entrepreneurship (Jensen et al 2014), job protection and entrepreneurial activity (Gottlieb et al 2018), and unemployment insurance and new business formation (Hombert et al 2020) in countries outside the U.S. are consistent with this view. Under a Knightian perspective, the relaxation of the personal liquidity constraint through the provision of a channel for income supplement and/or through the provision of employment fallbacks that serve as insurance for failed entrepreneurs should encourage additional entrepreneurial entry.…”

Personal Wealth and Self-Employment

“…downside protections focuses on how social insurance can encourage increased risk-taking by potential new business owners (e.g., Gottlieb, Townsend, and Xu (2016); Hombert et al (2020)). Our paper tests the effects of shocks to personal wealth on self-employment.…”

Partisan Entrepreneurship

“…3 For financial constraints see, for example, Bertrand et al (2007), Kerr and Nanda (2009), Chatterji and Seamans (2012), Robb and Robinson (2014), Kerr et al (2015), Adelino et al (2015), Schmalz et al (2017). For policies reducing risk see Hombert et al (2020), Gottlieb et al (2021). For training, peers and access to reproductive healthcare see Valdivia (2011), Drexler et al (2014), Fairlie et al (2015), Lerner and Malmendier (2013), Sørensen (2010), andZandberg (2021).…”