Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 458: Dissolving the entrepreneurship puzzle: Applying Fréchet distributions to Lazear’s occupational choice model

Björn Hårsman () and Lars-Göran Mattsson ()
Additional contact information
Björn Hårsman: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: SE-100 44 Stockholm, Sweden
Lars-Göran Mattsson: Royal Institute of Technology, Department of Transport Science, Postal: SE-100 44 Stockholm, Sweden

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

JEL-codes: J24; J30; L26; M13

26 pages, July 7, 2017

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