Entrepreneurship and Financial Incentives of Return, Risk, and Skew

Author:

Berkhout Peter1,Hartog Joop2,van Praag Mirjam3

Affiliation:

1. RIGO Research Institute, De Ruyterkade 112 C, 1011 AB Amsterdam, the Netherlands.

2. University of Amsterdam, Tinbergen Institute and IZA, Roeterssstraat 11, 1018 WB Amsterdam, the Netherlands.

3. Copenhagen Business School, Kilevej 14.A, 2000 Frederiksberg, Denmark.

Abstract

We focus on the role of the opportunity cost in the choice for entrepreneurship in favor of wage employment, that is, the wages given up as an employee. We argue that just like outside observers, potential entrepreneurs will face great difficulty to predict their earnings from entrepreneurship. The focus on earnings forgone may help to solve the lack of robust empirical support for the effect of financial incentives on the decision to become an entrepreneur. We find, consistent with standard theory, that a higher mean, lower variance, and higher skew in the relevant wage distribution reduce the likelihood of entrepreneurship.

Publisher

SAGE Publications

Subject

Economics and Econometrics,Business and International Management

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