The Effects of Experience on Entrepreneurial Optimism and Uncertainty
24 Pages Posted: 8 May 2006
This paper develops an occupational choice model in which entrepreneurs, who are initially uncertain about their true talent, learn from experience. As a consequence, both optimistic bias in talent beliefs and uncertainty diminish with experience. The model gives rise naturally to a heteroscedastic probit estimator of occupational choices, in contrast to the commonly used homoscedastic estimator. The model is applied to British data on self-employment and optimism for the period 1984-99. The empirical analysis supports the main propositions of the model: principally, entrepreneurs are found to be more optimistic than employees, and both optimism and uncertainty diminish with experience.
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