Experimentation and the Returns to Entrepreneurship
34 Pages Posted: 21 Nov 2014 Last revised: 1 Nov 2015
Date Written: October 31, 2015
Previous studies have argued that entrepreneurs earn less and bear more risk than salaried workers with otherwise similar characteristics. In a simple model of entrepreneurship, I show that estimates of mean and variance of returns to entrepreneurship used by these previous studies are biased, as they are based on cross-sectional data and fail to account for the option value of experimenting with new ideas. Using longitudinal data, I find patterns that are consistent with entrepreneurship as experimentation and returns to entrepreneurship that are more attractive than established by previous research.
Keywords: entrepreneurship, experimentation, real options
JEL Classification: M13, G31
Suggested Citation: Suggested Citation