Selection into Entrepreneurship and Self-Employment
We study the effects of ability and liquidity constraints on entrepreneurship. We develop a three sector Roy model that differentiates between entrepreneurs and other self-employed to address puzzling gaps that have emerged between theory and evidence on entry into entrepreneurship. The model predicts—and the data confirm—that entrepreneurs are positively selected on highly-remunerated human capital, but other self-employed are negatively selected on those same abilities; entrepreneurs are positively selected on collateral, but other self-employed are not; and entrepreneurship is procyclical, but self-employment is countercyclical.
We thank Josh Angrist, Steve Davis, David De Meza, Paul Gertler, Itzhak Gilboa, Florian Heider, Erik Hurst, Chinhui Juhn, Ed Lazear, Annamaria Lusardi, Ramana Nanda, Alex Popov, Jim Poterba, John van Reenen, David Robinson, Fan Wang, Noam Yuchtman, and seminar participants at Australian National University, the European Central Bank, Federal Reserve Bank of Kansas City, the IDC, London School of Economics, MIT, the NBER Summer Institute on Entrepreneurship, National University of Singapore, University of California-Berkeley, and University of Houston. We thank the Institute for Business Innovation at the Haas School of Business at the University of California, Berkeley. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.