Returns for Entrepreneurs Versus Employees: The Effect of Education and Personal Control on the Relative Performance of Entrepreneurs vis-a-vis Wage Employees

Tinbergen Institute Discussion Paper 09-111/3

35 Pages Posted: 12 Dec 2009

See all articles by Mirjam van Praag

Mirjam van Praag

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

Arjen van Witteloostuijn

University of Antwerp

Justin van der Sluis

University of Amsterdam (UvA); Tinbergen Institute

Date Written: November 30, 2009

Abstract

How valuable is education for entrepreneurs’ performance as compared to employees’? What might explain any differences? And does education affect peoples’ occupational choices accordingly? We answer these questions based on a large panel of US labor force participants. We show that education affects peoples’ decisions to become an entrepreneur negatively. We show furthermore that entrepreneurs have higher returns to education than employees (in terms of the comparable performance measure ‘income’). This is the case even when estimating individual fixed effects of the differential returns to education for spells in entrepreneurship versus wage employment, thereby accounting for selectivity into entrepreneurial positions based on fixed individual characteristics. We find these results irrespective of whether we control for general ability and/or whether we use instrumental variables to cope with the endogenous nature of education in income equations. Finally, we find (indirect) support for the argument that the higher returns to education for entrepreneurs is due to fewer (organizational) constraints faced by entrepreneurs when optimizing the profitable employment of their education. Entrepreneurs have more personal control over the profitable employment of their human capital than wage employees.

Keywords: entrepreneurship, self-employment, returns to education, performance, personal control, locus of control, human capital, wages, incomes

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

Suggested Citation

van Praag, Mirjam and van Witteloostuijn, Arjen and van der Sluis, Justin, Returns for Entrepreneurs Versus Employees: The Effect of Education and Personal Control on the Relative Performance of Entrepreneurs vis-a-vis Wage Employees (November 30, 2009). Tinbergen Institute Discussion Paper 09-111/3. Available at SSRN: https://ssrn.com/abstract=1520895 or http://dx.doi.org/10.2139/ssrn.1520895

Mirjam Van Praag (Contact Author)

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

Arjen Van Witteloostuijn

University of Antwerp ( email )

Prinsstraat 13
Antwerp, Antwerp 2000
Belgium

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

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