This paper elucidates the nature of entrepreneurship by comparing life-cycle income profiles and outcomes of individuals who share similar characteristics but differ in their choice of self- or paid employment. Results are based on U.S. administrative data from the Internal Revenue Service and Social Security Administration over the period 2000–2015 for subgroups of the population differing by gender, marital status, education, occupation, industry, cohort, and employment status. Contrary to top-coded survey evidence based on relatively small samples and short panels, we find that entrepreneurs with at least twelve years in self-employment during our sample have significantly higher average income and steeper, more persistent, income growth profiles than their paid-employed peers with similar characteristics. Contrary to survey evidence, we find that new entrants into self-employment have higher labor incomes and lower asset incomes prior to entry relative to similar peers that do not enter. A theory of entrepreneurial choice is developed and compared to the subsample of young entrepreneurs in our data. We find that including firm-specific investment and selection under incomplete information is necessary if the theory is to match the observed income growth profiles and switching behavior for these young entrepreneurs.
Read the paper: On the Nature of Entrepreneurship
