Author Abstract
Small business owners and others in self-employment have the option to transition to paid work. If there is initial uncertainty about earnings in entrepreneurship, this option increases the expected lifetime value of entering self-employment relative to expected pay in a single year. This paper first documents that moves between paid work and self-employment are common and consistent with experimentation to learn about entrepreneurial earnings. This pattern motivates estimating the expected returns to entering self-employment within a dynamic lifecycle model that allows for non-random selection in and out of self-employment and gradual learning about the entrepreneurial earnings process. The model accurately fits entry patterns into self-employment by age, with returns to entrepreneurship varying over the lifecycle. The pre-tax lifetime value of self-employment is positive at the median. The option to return to paid work is large enough to reverse the result from cross-sectional studies that the median man expects to earn significantly less from self-employment. However, after accounting for progressive taxation and the additional employer portion of the payroll tax assessed on the self-employed, the median lifetime after-tax earnings gap between self-employment and paid work is approximately zero.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: September 2016
- HBS Working Paper Number: HBS Working Paper #17-022
- Faculty Unit(s): Entrepreneurial Management