DP13225 A General Equilibrium Theory of Occupational Choice under Optimistic Beliefs about Entrepreneurial Ability

Author(s): Michele Dell?Era, Luca David Opromolla, Santos-Pinto
Publication Date: October 2018
Keyword(s): entrepreneurship, General Equilibrium, Optimism
JEL(s): D50, H21, J24, L26
Programme Areas: Labour Economics, Industrial Organization, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13225

This paper studies the impact of optimism on occupational choice using a general equilibrium framework. The model shows that optimism has four main qualitative effects: it leads to a misallocation of talent, drives up input prices, raises the number of entrepreneurs, and makes entrepreneurs worse off. We calibrate the model to match U.S. manufacturing data. This allows us to make quantitative predictions regarding the impact of optimism on occupational choice, input prices, the returns to entrepreneurship, and output. The calibration shows that optimism can explain the empirical puzzle of the low mean returns to entrepreneurship compared to average wages.