It's the Opportunity Cost, Stupid! How Self-Employment Responds to Financial Incentives of Return, Risk and Skew
affiliation not provided to SSRN
University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute for Economic Research); Institute for the Study of Labor (IZA)
Mirjam Van Praag
University of Amsterdam - Department of Economics; Tinbergen Institute; Institute for the Study of Labor (IZA); Tinbergen Institute; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Economics
November 1, 2011
Tinbergen Institute Discussion Paper 11-165/3
There is no robust empirical support for the effect of financial incentives on the decision to work in selfemployment rather than as a wage earner. In the literature, this is seen as a puzzle. We offer a focus on the opportunity cost, i.e. the wages given up as an employee. Information on income from self-employment is of inferior quality and this is not just a problem for the outside researcher, it is an imminent problem of the individual considering self-employment. We also argue that it is not only the location of an income distribution that matters and that dispersion and (a)symmetry should not be ignored. We predict that higher mean, lower variance and higher skew in the wage distribution in a particular employment segment reduce the inclination to prefer self-employment above employee status. Using a sample of 56,000 recent graduates from a Dutch college or university, grouped in approximately 120 labor market segments, we find significant support for these propositions. The results survive various robustness checks on specifications and assumptions.
Number of Pages in PDF File: 33
Keywords: entrepreneurship, self-employment, wage-employment, income distribution, income risk, income skew, income variance, occupational choice, labor market entry, labor market segments, opportunity cost
JEL Classification: J24, L26working papers series
Date posted: November 25, 2011
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