On the Nature of Entrepreneurship

This paper provides insights into the nature of entrepreneurship using a novel panel dataset based on U.S. administrative data from the Internal Revenue Service and the Social Security Administration. These data are used to analyze patterns of income growth and determinants of entrepreneurial choice for a large population of business owners. Earlier studies relying on household survey data have been limited by small samples, short panels, and income top-coding and, as a result, have focused on the typical self-employed individual rather than the typical dollar earned in self-employment. Without these limitations, we find that self-employed individuals have significantly higher average income and steeper income growth profiles than paid-employed peers with similar characteristics. Contrary to the survey evidence, we find a smaller role for non-pecuniary motives in driving entrepreneurial choice, little evidence for high risk factors or liquidity constraints impeding entry, and a positive role for past on-the-job experience to start a business. Across years, we find stable entry and exit rates into self-employment and no decline in the share of entrepreneurs in the population over our sample period, even during the Great Recession.