The Unobserved Returns to Entrepreneurship: Evidence from the PSID

Ewing Marion Kaufmann Foundation Research Paper

44 Pages Posted: 13 Mar 2012

See all articles by Sarada

Sarada

Wisconsin School of Business

Date Written: September 1, 2010

Abstract

This paper resolves a longstanding empirical puzzle: that most entrepreneurs persist despite lower initial earnings and earnings growth. I hypothesize that consumption is a better measure of self-employment returns than reported income, suffering from fewer biases. Using 38 years of longitudinal data, I find that individuals in self-employment report earning 26.2% less, but consume 4.5% more. This increase comes from persistence, with consumption growing 0.85% more annually in self-employment. Increased consumption is not offset by lower savings or higher uncertainty, and those who fail in self-employment do not incur observable losses in lifetime consumption. Lastly, individuals work more in self-employment.

Keywords: Entrepreneurship Labor Self-Employment Consumption Expenditures Tax Underreporting

JEL Classification: E2, E21, E24

Suggested Citation

Sarada, The Unobserved Returns to Entrepreneurship: Evidence from the PSID (September 1, 2010). Ewing Marion Kaufmann Foundation Research Paper, Available at SSRN: https://ssrn.com/abstract=1690317 or http://dx.doi.org/10.2139/ssrn.1690317

Sarada (Contact Author)

Wisconsin School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

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