The effect of social capital on the career choice of entrepreneurship or employment in a closed ecosystem

Abstract

Restricted by China’s “hukou” system, the population in any given area of the country is relatively constant, and its employability and workability are mutually determined, as in a closed ecosystem. Social capital (or “guanxi” in Chinese society) in China has the effects of reducing set-up costs for entrepreneurship or securing the job-seeking for employment. This paper uses equilibrium analysis and makes some modifications to Kihlstrom and Laffont’s model to explore career choice mechanisms in China’s context. It was found that when social capital only reduces the set-up costs for entrepreneurship, there exists one equilibrium point; individuals with more social capital will choose entrepreneurship, and those with less social capital will be workers or unemployed. When social capital simultaneously reduces the set-up costs for entrepreneurship and secures employment, four equilibrium points appear along with the strength of social capital, and the career options occur in the order of entrepreneurship, employment, entrepreneurship, and unemployment. The findings fill the gap that career choice is mainly determined by an individual’s risk-aversion and contribute specifically to China’s entrepreneurship and employment selection.