If You are so Smart, Why Aren’t You an Entrepreneur? Returns to Cognitive and Social Ability: Entrepreneurs Versus Employees

43 Pages Posted: 10 Jan 2011

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

Date Written: November 22, 2010

Abstract

How valuable are cognitive and social abilities for entrepreneurs relative to employees earnings? We answer three questions: (1) To what extent does a composite measure of ability affect an entrepreneur's earnings relative to wages earned by employees? (2) Do different cognitive abilities (e.g., math ability, language, or verbal 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 (difference-of-difference) estimates of the returns to ability for spells in entrepreneurship versus wage employment account for selectivity into entrepreneurial positions insofar as they are determined by fixed individual characteristics. Our robust results provide the following answers to the three questions: General ability has a stronger impact on entrepreneurial incomes than on wages. Moreover, entrepreneurs and employees benefit from different sets of specific abilities: verbal and clerical abilities have a stronger impact on wages, whereas mathematical, social, and technical ability are more valuable for entrepreneurs. 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.

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 (November 22, 2010). Journal of Economics & Management Strategy, Vol. 19, No. 4, pp. 947-989, 2010. Available at SSRN: https://ssrn.com/abstract=1733429 or http://dx.doi.org/10.1111/j.1530-9134.2010.00274.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

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