The Unobserved Returns from Entrepreneurship
45 Pages Posted: 25 Aug 2015
Date Written: June 12, 2015
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
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