KTH/CESIS Working Paper Series in Economics and Institutions of Innovation
Dissolving the entrepreneurship puzzle: Applying Fréchet distributions to Lazear’s occupational choice model
() and Lars-Göran Mattsson
Abstract: The paper deals with the selection into entrepreneurship
and more precisely with Lazear’s model of occupational choice between
entrepreneurship and paid employment. The basic aim is to show that lower
expected income for entrepreneurs vs. wage-employed is fully compatible
with Lazear’s assumption that the selection into entrepreneurship is based
upon income maximization – there is no “return to entrepreneurship puzzle”.
We will prove this by deriving the theoretical implications that follow
from the assumption that skills are Fréchet distributed. Another aim is to
shed some empirical light on the resulting theoretical results. This is
done by using individual level data from the Swedish employment register
for 2004-2008 to compute the parameters of the Fréchet distribution and the
corresponding income distributions for self-owners and wage employed. The
paper contributes to earlier literature by resolving the so called income
paradox and by demonstrating the rich possibilities for empirical studies
inherent in the Lazear model.
Keywords: entrepreneurship; occupational choice; self-owning; skill distribution; Fréchet distribution; entrepreneurship puzzle; (follow links to similar papers)
JEL-Codes: J24; J30; L26; M13; (follow links to similar papers)
26 pages, July 7, 2017
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