Some Empirical Aspects of Entrepreneurship

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Some Empirical Aspects of Entrepreneurship

• By David S. Evans and Linda S. Leighton
• Agata
  Naroznik
• Levan
  Bzhalava

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Introduction

• 4.2 million people operate business on a full
  time basis.
• They employ tenth of all wage workers
• Self-employed has increase since mid-1970s

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Small Firms

• Major source of industrial changes
• Creating a disproportionate share of new jobs
• Many states have programs to stimulate small-firm
  formation

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Great Britain, France, Belgium, Netherlands

• Helping unemployed workers start business

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Determinants of self-employment?
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Contents

• I - Data description.
• II - Statistics on self-employment entry and exit
  over the life cycle and report estimates.
• III - Determinants of self-employments earnings
• IV - Conclusion

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Data description

• The National Longitudinal Survey (NLS)
• White men between 14-24 in 1966
• Surveyed yearly between 1966 and 1971 and 1973,
  1975, 1976, 1978, 1980 and 1981
• 1966 3918 respondents
• 1981 2731 respondents

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Data description

• The March Supplement to the Current Population
  Survey (CPS) for 1968-1987
• 150000 white men between age 18-65
• Information on the employment status for the
  survey year and for the previous

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Entry and Exit over the life cycle

• Simple time-homognous Markov model
• The probability that an individual will operate
  business T years after entering the labour force
  is
• e probability of entering the self-employment
• x probability of exiting self-employmet

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Entry and Exit over the life cycle
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Entry and Exit over the life cycle
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Entry and Exit over the life cycle
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Entry and Exit over the life cycle
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Entering self-employment

• Expected utility of self employmet

• Expected utility of wage work

gt
THAN Individual switchs to self-employment
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Entering Self-employmet

• The probability of switching into self-employment
  increases with net worth assets (NLS),
  liquidity (CPS)
• Wage experience is statisticaly insignificent
• Individuals with low wages are more likely to
  switch
• Individuals with longer job tenure are less
  likely to switch into self-employment
• Individuals who have changed job frequently are
  more likely to switch

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Entering self-employmet

• The individuals who have had prior
  self-employment experience are more likely to
  switch
• The effect of previuos unemployment is not
  consistent
• 1980-1981 positive and significant
• 1976-1978 negative and insignificant
• 1978-1980 negative and insignificant

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Entry and Exit - Conclusion

• Entry is time homogenous
• Exit decreases sharply with time
• Workers with low wages and a history of
  instability are more likely to switch to
  self-employment holding assets and education
  constraints.

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III. Self Employment Selection and Earnings

• Previous Works
• Borjas and Bronars (1987)
• Evans (1985)
• Brock and Evans (1986)
• 1980 Census data
• Rees and Shah (1985)
• U.K. data on small cross section
• Blau (1985)
• Malaysian farmers Data

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Data problems of Previous works

• No information on self-employment versus wage
  experiences
• 2. Sparse information on personal
  characteristics.

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NLS Data

• Gives possibility to estimate a much more refined
  model and to investigate the effect of wage and
  self-employment experience on wage and
  self-employment earnings.

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Data

• Consist 2,405 white man who were in the 1981 NLS
  survey.
• A total of 272 individuals were deleted either
  because they held both wage and self-employment
  jobs or because information was inconsistent.

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Result of Probit Estimation

• Probability of being self-employed increases with
  
• labor-market experience
• Changing job frequently
• Relatively more unemployment experience
• More educated individuals in professional
  occupations
• More internal locus of control
• Having father manager

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Differences in Return

• wage experience in self-employment (2.1)
• wage experience in wage work (5.6)
• Self-employment experience in self- employment
  (4.6)

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Differences in Return

• For professional workers the returns to education
  are higher in self-employment than in wage work
• Unemployment experience carries larger penalty in
  self-employment than in wage work

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Interpretation of the Differences

• Human-capital accumulated through wage work is
  less valuable in self-employment than wage work.
• Individual who switch into self-employment later
  in their careers (and who have thereby
  accumulated more wage experience) are relatively
  poorer wage worker

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IV. Conclusions

• Probability of entering self-employment is
  independent of age or experience for the first 20
  years of employment
• But
• Individuals face liquidity constraints and have
  to accumulate assets to start business.
• Discovering a business opportunities takes time.
• Older people might be more likely to have
  identified an opportunity but less likely to
  choose to exploit it.

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IV. Conclusions

• Determinants of switching from wage work to
  self-employment
• Relatively low wage.
• Frequently changing jobs.
• Frequently experiencing unemployment as wage
  workers.
• More internal locus of control

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• Questions, Comments.