Entrepreneurial Tail Risk: Implications for Employment Dynamics

97 Pages Posted: 23 Nov 2013

See all articles by Thorsten Drautzburg

Thorsten Drautzburg

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: November 12, 2013


New businesses are important for job creation and have contributed more than proportionally to the expansion in the 1990s and the decline of employment after the 2007 recession. This paper provides a framework for analyzing determinants of business creation in a world where new business owners are exposed to idiosyncratic risk due to initial imperfect diversification. This paper uses this framework to analyze how entrepreneurial risk has changed over time and how this has affected employment in the US. Conditions are provided under which entrepreneurial risk can be identified using micro data on the size distribution of new businesses and their exit rates. The baseline model considers both upside and downside risk. Applied to US time series data, structural estimates suggest that higher upside risk explains much of the high job creation in the late 1990s. Time variation in risk explains around 40% of the variation in employment of new businesses. Reduced form results show that this relationship is strongest in IT-related industries. When restricting the model to a single risk factor, the explanatory power for employment drops by 25% to 50% compared to the baseline estimates.

Keywords: Employment, Entrepreneurial Risk

Suggested Citation

Drautzburg, Thorsten, Entrepreneurial Tail Risk: Implications for Employment Dynamics (November 12, 2013). FRB of Philadelphia Working Paper No. 13-45, Available at SSRN: https://ssrn.com/abstract=2358413 or http://dx.doi.org/10.2139/ssrn.2358413

Thorsten Drautzburg (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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