Occupational Choice and the Private Equity Premium Puzzle

Abstract

This paper suggests a solution to what has become known as the "private equity premium puzzle" (Moskowitz and Vissing-Jorgensen (2002)). We interpret occupational choice as a dynamic portfolio choice problem of a life-cycle investor facing a liquidity constraint and imperfect information about the profitability of potential businesses. In this setting, becoming an entrepreneur is equivalent to investing in non-traded private equity capital subject to transaction costs. We model the return on private equity as the sum of two components, the individual ability of the entrepreneur and idiosyncratic business risk. Information is imperfect, because only entrepreneurs observe their own business risk realizations. Using numerical techniques we find that the model generates the observed return structure for private equity using standard CRRA-preferences and fully rational expectations.

The effect of mobile technology on self-employment in Kenya

“…M-credit is coded 1 if the respondent has ever received credit from either M-Shwari or KCB M-PESA and 0 otherwise. Bhavnani et al (2008), Jagun et al (2008), Amegbe et al (2017), Komunte (2015) x 2 = Age Age of respondent in years Simoes et al (2016), Vejsiu (2011), Hintermaier and Steinberger (2005), Krasniqi (2014) x 3 = Age squared Age squared…”

“…These effects are explained by the fact that people's stock of human, financial, and social capital tends to accumulate with age. However, the negative effect after the threshold is attributed to higher risk aversion among older people and the less time that is required for such people to recoup their start-up investment (Hintermaier & Steinberger, 2005). According to Krasniqi (2014), the negative effect after the threshold is attributed to the waning of the individual's aspirations, entrepreneurial dreams, and dynamism due to old age and failing health.…”

Individual Determinants of Self‐employment Entry: What Do We Really Know?

“…In turn, some other important arguments identify a negative influence of age on self‐employment entry above a given threshold. These include: higher risk aversion levels, lower physical and mental availability for long work weeks, stress situations that are usually associated with self‐employment activities, and less time to recover the initial investment made at the entry (Hintermaier and Steinberger, ).…”

Self‐employed But Looking: A Labour Market Experiment

“…It has been argued that entrepreneurship has option value: it is always possible to quit and (re)enter employment if the venture is unsuccessful (Polkovnichenko ). If future earnings potential is not at risk, then it makes good sense to test the waters and start a business that could yield large rewards (see also Hintermaier and Steinberger ). In this paper, we report a natural field experiment that seeks to verify under carefully controlled conditions the premise that entrepreneurs can indeed re‐enter salaried employment as easily as non‐entrepreneurs.…”