DP15143 Selection into entrepreneurship and self-employment

Author(s): Ross Levine, Yona Rubinstein
Publication Date: August 2020
Keyword(s): business cycles, Corporate Finance, entrepreneurship, Human Capital, Occupational choice
JEL(s): E32, G32, J24, L26
Programme Areas: Labour Economics, Financial Economics, Development Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15143

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 cognitive and non-cognitive human capital skills, 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.