The Properties of Income Risk in Privately Held Businesses

Indiana University, Bloomington School of Public & Environmental Affairs Research Paper No. 2012-12-01

52 Pages Posted: 17 Dec 2012 Last revised: 30 Jan 2013

See all articles by Jason Matthew DeBacker

Jason Matthew DeBacker

University of South Carolina - Darla Moore School of Business

Bradley T. Heim

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Vasia Panousi

University of Montreal, Department of Economics

Shanthi Ramnath

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Ivan Vidangos

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 16, 2012

Abstract

Our paper represents the first attempt in the literature to examine the properties and document the empirical stylized facts of income risk from privately held businesses in the US using a large panel. We employ a new, large, and confidential panel of US income tax returns for the period 1987-2009 to extensively characterize and quantify business income risks and to compare to labor income or earnings risks. We find that business income is much riskier than labor income, even conditional on a household's continued participation in private business endeavors. Compared to labor income, business income is less persistent, and it is characterized by higher probabilities of extreme upward or downward mobility. Furthermore, the distribution of business income risk has less mass in the middle and exhibits significantly thicker tails, compared to the distribution of labor income risk. Our data also suggest that high-income households are more likely to face the tail risks on both ends of the business income distribution. In addition, we provide evidence indicating that, from a lifetime perspective and taking into account the total resources at the household level, the choice to participate in private businesses may not be as big a puzzle as it has been previously thought.

Keywords: business income risk, entrepreneurs, private businesses, tax returns data

JEL Classification: D10, D31, E20

Suggested Citation

DeBacker, Jason Matthew and Heim, Bradley T. and Panousi, Vasia and Ramnath, Shanthi and Vidangos, Ivan, The Properties of Income Risk in Privately Held Businesses (December 16, 2012). Indiana University, Bloomington School of Public & Environmental Affairs Research Paper No. 2012-12-01. Available at SSRN: https://ssrn.com/abstract=2190172 or http://dx.doi.org/10.2139/ssrn.2190172

Jason Matthew DeBacker

University of South Carolina - Darla Moore School of Business ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

Bradley T. Heim

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

1315 East Tenth Street
Bloomington, IN 47405
United States

Vasia Panousi (Contact Author)

University of Montreal, Department of Economics ( email )

C.P. 6128 succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

HOME PAGE: http://https://sites.google.com/site/panousi/

Shanthi Ramnath

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

Ivan Vidangos

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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