If You Are So Smart, Why Aren't You an Entrepreneur? Returns to Cognitive and Social Ability: Entrepreneurs Versus Employees

Abstract

How valuable are cognitive and social abilities for entrepreneurs’ relative to employees’ earnings? We answer three questions: (1) To what extent does a composite measure of ability affect an entrepreneur's earnings relative to wages earned by employees? (2) Do different cognitive abilities (e.g., math ability, language, or verbal ability) and social ability affect earnings of entrepreneurs and employees differently?, and (3) Does the balance in these measured ability levels affect an individual's earnings? Our (difference‐of‐difference) estimates of the returns to ability for spells in entrepreneurship versus wage employment account for selectivity into entrepreneurial positions insofar as they are determined by fixed individual characteristics. Our robust results provide the following answers to the three questions: General ability has a stronger impact on entrepreneurial incomes than on wages. Moreover, entrepreneurs and employees benefit from different sets of specific abilities: verbal and clerical abilities have a stronger impact on wages, whereas mathematical, social, and technical ability are more valuable for entrepreneurs. The balance in the various kinds of ability also generates a higher income, but only for entrepreneurs: This finding supports Lazear's Jack‐of‐all‐Trades theory.

Balanced skills among nascent entrepreneurs

“…However, more research is needed to provide further support for the notion that balanced skills positively predict entrepreneurial earnings, as Lazear's model posits. Whereas Hartog et al (2010) found empirical support for this notion, Åstebro and Thompson's (2011) results do not support this proposition.…”

“…In general, the link between entrepreneurial performance and a balanced skill set has not been thoroughly investigated yet (see for notable exceptions Oberschachtsiek in press; Åstebro and Thompson 2011; Hartog et al 2010), and we could identify only one empirical study investigating performance effects of balanced skills in a nascent entrepreneurship context. Examining a representative sample of nascent projects, Brixy and Hessels (2010) found contradictory results between several measures of balanced skills and nascent entrepreneurship success -an objective indicator of balanced skills was not correlated with success, while entrepreneurs who perceived themselves as generalists were less likely to get a nascent project up and running.…”

Beyond Qualifications: Returns to Cognitive and Socio-Emotional Skills in Colombia

“…Individuals with high-order cognitive skills (learning aptitudes and success as a salaried worker), a tendency to break the rules, and high self-esteem in adolescence are more likely to become successful long-term entrepreneurs in the United States (Levine and Rubinstein 2013). In the Netherlands, language and clerical abilities have a stronger impact on employees' wages, whereas mathematical ability, technical ability, and extraversion in early childhood are more valuable for entrepreneurs (Hartog, van Praag, and van der Sluis 2010). Moreover, entrepreneurs with a balance in abilities across different fieldsthat is, a jack of all tradeshave higher incomes vis-à-vis salaried workers (Lazear 2005; Hartog, van Praag, and van der Sluis 2010).…”

The Origins and Extent of Entrepreneurial Action-Orientedness: An Experimental Study

“…These studies have usually employed as control groups employees (Hartog et al, 2010;Van Praag et al, 2013;Shyti and Paraschiv, 2014) or the population at large (Holm et al, 2013). We use a sample of employees.…”