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  • 2017
  • Working Paper
  • HBS Working Paper Series

Self-Employment Dynamics and the Returns to Entrepreneurship

By: Eleanor W. Dillon and Christopher T. Stanton
  • Format:Print
  • | Language:English
  • | Pages:78
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Abstract

Small business owners and others in self-employment have the option to transition to paid work. If there is initial uncertainty about entrepreneurial earnings, this option increases the expected lifetime value of self-employment relative to pay in a single year. This paper first documents that moves between paid work and self-employment are common and consistent with experimentation to learn about earnings. This pattern motivates estimating the expected returns to entrepreneurship within a dynamic lifecycle model that allows for non-random selection and gradual learning about the entrepreneurial earnings process. Using longitudinal data on men from the Panel Survey of Income Dynamics (PSID), the model accurately fits entry patterns into self-employment by age. The option value of returning to paid work is found to constitute a substantial portion of the monetary value of entrepreneurship. The model is then used to evaluate policies that change incentives for entry into self-employment.

Keywords

Self-employed; Small Business; Business Earnings; Entrepreneurship; Ownership; Compensation and Benefits

Citation

Dillon, Eleanor W., and Christopher T. Stanton. "Self-Employment Dynamics and the Returns to Entrepreneurship." Harvard Business School Working Paper, No. 17-022, September 2016. (Revised March 2018.)
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About The Author

Christopher T. Stanton

Entrepreneurial Management
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Related Work

    • 2017
    • Faculty Research

    Self-Employment Dynamics and the Returns to Entrepreneurship

    By: Eleanor W. Dillon and Christopher T. Stanton
Related Work
  • Self-Employment Dynamics and the Returns to Entrepreneurship By: Eleanor W. Dillon and Christopher T. Stanton
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