The Right Stuff? Personality and Entrepreneurship

Abstract

A puzzling feature of entrepreneurship is that many individuals are self-employed even though they would earn more in paid employment. To shed light on this puzzle, we examine the role of personality traits in determining entrepreneurial decisions and earnings. We estimate a model in which agents maximize expected utility by choosing between self and paid employment. We allow personality traits to affect earnings in each sector along with underlying preferences over sectors. We find that the personality traits that make entrepreneurship profitable are not always the same personality traits that drive people to open their own business. This means that, in terms of personality traits, individuals who would be the highest earning entrepreneurs are not always the individuals who choose to be entrepreneurs. We go on to use the estimated model to assess various policies designed to encourage entrepreneurship. In general, we find that these policies either subsidize businesses that would have been started without a subsidy or that they attract individuals with personality traits associated with preferences for entrepreneurship, but who have low-quality business ideas.

Keywords: Entrepreneurship, Personality, Non-cognitive skills, Latent factors

JEL Classification: J23, J24, J31, J32