Occupational choice and the quality of entrepreneurs

Abstract

This paper focuses on the quality of entrepreneurs when individuals, who di¤er in terms of entrepreneurial ability and wealth, choose between entrepreneurship and wage-earning. A loan is required to become an entrepreneur. Four wealth classes form endogenously. Banks' inability to identify the ability of individuals leads them to o¤er pooling contracts to the poor and the lower-middle classes. Regardless of ability, all poor class individuals become workers and all lower-middle class individuals become entrepreneurs. Banks are able to o¤er separating contracts to the upper-middle and the rich classes. High-ability individuals in these wealth classes become entrepreneurs and their low-ability counterparts become workers. Equilibrium contracts may entail cross-subsidies within or between occupations. In some economies, a small success tax on entrepreneurs used to subsidize workers can increase the average quality of entrepreneurs and welfare by changing the thresholds of the wealth classes. In some others a reverse policy is required. Since the aggregate level of investment is …xed, the reason for these policies is not under-or overinvestment by entrepreneurs, as it often is in previous literature.Keywords: adverse selection; entrepreneurship; general equilibrium contract theory; moral hazard; occupational choice; success tax; wage subsidy JEL Classi…cation: D43; D82; H25; L26

Serial entrepreneurship, learning by doing and self-selection

“…Even so, selection on ability as a source of serial entrepreneurship had been early proposed in theory (e.g., Holmes and Schmitz, 1990). Actually, theoretical grounds suggest that unobserved talent shapes entrepreneurial entry (Inci, 2013) and that, moreover, individuals learn and update beliefs about their entrepreneurial ability as they accumulate experience in entrepreneurship (Jovanovic, 1982;Parker, 2006). This is expected to generate a dynamic process where high-skill entrepreneurs tend to shut down businesses of low quality to become serial entrepreneurs, launching and subsequently closing …rms until a high quality business is found, while low-skill entrepreneurs are expected to shut down their businesses of low quality to enter the labor market (Plehn-Dujowich, 2010).…”

Determinants of female entrepreneurship in male- and female-dominated sectors in selected European countries

“…The neo-classical approach as reflected in occupational choice theory treats entrepreneurship as an individual choice between a wage worker with a riskfree salary and an entrepreneur with uncertain entrepreneurial profit (i.e. Inci, 2013;Salas-Fumás et al, 2014). Comparing costs and benefits from these two forms of occupation, the decision to enter into entrepreneurship is made when the net entrepreneurial benefits exceed the net employment benefits.…”

“…This choice is made based on the perceived costs and benefits of these two forms of professional activity, which is explained by occupational choice theory (i.e. Inci, 2013;Salas-Fumás, et al, 2014).…”

All entrepreneurial productivity increases are not created equal

“… The transaction cost that an entrepreneur faces could also represent the value of his outside opportunity, as in Ghatak, Morelli, and Sjostrom () and Inci (), for example. The transaction cost is a nonmonetary cost.…”

“…Dynamic models in which the mix of low‐ and high‐quality projects in the population varies endogenously over time (e.g., Jovanovic, ) might also be explored. Furthermore, the impact of competitive lending sectors (e.g., Jaimovich, ; Inci, ) might be analyzed.…”