The Unobserved Returns from Entrepreneurship

Abstract

This paper is an empirical study of the risk-return trade-off faced by entrepreneurs. It calls into question a longstanding empirical puzzle: that most entrepreneurs preserve despite persistently low earnings and earnings growth. I find that entrepreneurial earnings are severely mismeasured and opt instead to use household expenditure and wealth as income proxies. Using 38 years of longitudinal data, I find that while individuals (mis)report earning on average 26.2% less in self-employment, their household expenditures are in fact 4.5% higher. This expenditure premium accrues over time with longer experience in self-employment, and is not offset by lower savings or higher uncertainty.

Keywords: risk-return tradeoff; occupational choice; self-employment; entrepreneurship; consumption; savings

JEL Classification: E21, E24, E26, G11, H26, J2