Entrepreneurship and Financial Incentives of Return, Risk, and Skew

Abstract

We focus on the role of the opportunity cost in the choice for entrepreneurship in favor of wage employment, that is, the wages given up as an employee. We argue that just like outside observers, potential entrepreneurs will face great difficulty to predict their earnings from entrepreneurship. The focus on earnings forgone may help to solve the lack of robust empirical support for the effect of financial incentives on the decision to become an entrepreneur. We find, consistent with standard theory, that a higher mean, lower variance, and higher skew in the relevant wage distribution reduce the likelihood of entrepreneurship.

A Careers Perspective on Entrepreneurship

“…It is also consistent with theories that suggest there are two types of entrepreneurship: necessity-based (e.g., Borjas & Bronars, 1989;Joona & Wadensjo, 2013) and opportunity-driven-some are pushed into entrepreneurship because they lack other whereas others pursue entrepreneurial opportunities when they perceive the potential rewards to be greater than those obtained from wage employment options (e.g., Carnahan, Agarwal, & Campbell, 2012;Gimeno, Folta, Cooper, & Woo, 1997;Hartog, Van Praag, & Van Der Sluis, 2010;Joona & Wadensjo;Lofstrom, Bates, & Parker, 2014;Sørensen & Sharkey, 2014). This volume opens with an article by Berkjout, Hartog, and van Praag (2016) that takes the next step in this line of reasoning to ask how structural features of the wage distribution within an occupation, and hence the opportunity cost of leaving that occupation, impact entrepreneurial propensities.…”

“…Some bring novel methods or develop new measures (Chen & Thompson;Hsieh, 2016). Some introduce new conceptual ideas (Blumberg & Pfann, 2016;Hsieh, 2016;Thebaud, 2016), some incorporate insights from other fields such as gendered institutions (Thebaud) and opportunity costs (Berkhout et al, 2016). Some bring rigorous empirical evidence to long-standing questions in entrepreneurship research (Frederiksen et al, 2016) and some ask new questions (Luzzi & Sasson, 2016).…”

The option value in Jack‐of‐all‐trades investment

“…Our new JAT is consistent with the former prediction (as more the generalized skillsets enjoy higher values when the better outcomes of high‐volatility industries are realized), and could be modified for team‐based rather than individual‐based skills investments for the latter issue. The conversation also notes that an individual's choice between entrepreneurship and employment is partially based on relevant perceived risk related to those choices (e.g., Guerra & Patuelli, 2016), and that individuals find it more difficult to predict future entrepreneurial earnings (e.g., Berkhout, Hartog, & Van Praag, 2016). Of course, our modified JAT is wholly consistent with those arguments (where we model the two career earnings risks together and relatively, rather than separately and absolutely).…”

The Returns to Entrepreneurship: Evidence from Matched Person-Firm Data

“…At the same time, self-employment may be a close substitute for wage employment, typically in the low end of the wage distribution and may also have little to do with entrepreneurship in the classical, Schumpeterian sense. 6 An entrepreneur may still be a wage earner in another …rm than where (s)he is an ownermanager. 7 In most cases, the owner-manager will have full control and can easily transfer equity in and out of the …rm without regarding the preferences of other shareholders and con ‡icts of interest.…”