Earnings Overconfidence and the Transition to Self-employment
Posted: 6 May 2011 Last revised: 17 Aug 2011
Date Written: May 4, 2011
The link between overconfidence and entrepreneurial entry is of increasing scholarly interest. However, research has yet to offer an empirical test linking overconfidence in earnings ability to entry into entrepreneurship that includes all of the following features that would help substantiate the case: (1) is based on representative data that includes individuals who do and do not become entrepreneurs to minimize selection bias; (2) includes a reasonable measure of earnings overconfidence that temporally precedes the transition to entrepreneurship (i.e., data that are not cross-sectional); (3) has a sufficiently large number of transitions into entrepreneurship that allows for sufficient degrees of freedom for robust analysis; and, concomitantly, (4) includes a wide array of economic, psychological, and sociological covariates that are plausibly associated with both overconfidence and the transition to entrepreneurship to account for potential spuriousness.
The objective of this research is to provide a more compelling test of the theorized link between absolute and relative earnings overconfidence and entrepreneurship. I find the following: Overconfidence in earnings ability has a positive, long-term effect on the probability of actually becoming an entrepreneur. Notably, various (lagged) measures of overconfidence are used to arrive at this conclusion using data that generalize to a segment of the US population. The data also include a wide array of economic, psychological, and sociological covariates that have been theorized - or are plausibly associated with - overconfidence and entrepreneurship or self-employment that help address alternative explanations.
Keywords: Entrepreneurship, self-employment, earnings, overconfidence
Suggested Citation: Suggested Citation