If You Are So Smart, Why Aren't You an Entrepreneur? Returns to Cognitive and Social Ability: Entrepreneurs versus Employees

33 Pages Posted: 18 Aug 2008

See all articles by Joop Hartog

Joop Hartog

University of Amsterdam - Faculty of Economics and Business (FEB); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute); IZA Institute of Labor Economics

Mirjam van Praag

University of Amsterdam - Department of Economics; Copenhagen Business School; Tinbergen Institute; IZA Institute of Labor Economics

Justin van der Sluis

University of Amsterdam (UvA); Tinbergen Institute

Abstract

How valuable are cognitive and social abilities for entrepreneurs' incomes as compared to employees? We answer three questions: (1) To what extent does a composite measure of ability affect an entrepreneur's earnings relative to employees? (2) Do different cognitive abilities (e.g. math ability, language ability) and social ability affect earnings of entrepreneurs and employees differently?, and (3) Does the balance in these measured ability levels affect an individual's earnings? Our individual fixed-effects estimates of the differential returns to ability for spells in entrepreneurship versus wage employment account for selectivity into entrepreneurial positions as determined by fixed individual characteristics. General ability has a stronger impact on entrepreneurial incomes than on wages. Entrepreneurs and employees benefit from different sets of specific abilities: Language and clerical abilities have a stronger impact on wages, whereas mathematical, social and technical ability affect entrepreneurial incomes more strongly. The balance in the various kinds of ability also generates a higher income, but only for entrepreneurs: This finding supports Lazear's Jack-of-all-Trades theory.

Keywords: (non-)cognitive abilities, intelligence, earnings, entrepreneur(ship), wage employment, income differentials

JEL Classification: J23, J24, J31, J44, M13

Suggested Citation

Hartog, Joop and van Praag, Mirjam and van der Sluis, Justin, If You Are So Smart, Why Aren't You an Entrepreneur? Returns to Cognitive and Social Ability: Entrepreneurs versus Employees. IZA Discussion Paper No. 3648. Available at SSRN: https://ssrn.com/abstract=1230835 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Joop Hartog (Contact Author)

University of Amsterdam - Faculty of Economics and Business (FEB) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Mirjam Van Praag

University of Amsterdam - Department of Economics ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
+31 20 525 4096 (Phone)
+31 20 525 4182 (Fax)

Copenhagen Business School ( email )

Kilevej 14A
Frederiksberg, 2000
Denmark

Tinbergen Institute

Gustav Mahlerlaan
Amsterdam
Netherlands

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Justin Van der Sluis

University of Amsterdam (UvA) ( email )

Roetersstraat 11
Room 10.07, Building E
1018 WB Amsterdam
Netherlands
+31(0)20 525 4110 (Phone)
+31(0)20 551 3555 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
265
rank
113,077
Abstract Views
1,280
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information