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: Resolving 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 analyzes the selection into entrepreneurship. We show that Lazear’s (2004, 2005) model of occupational choice between entrepreneurship and wage employment is compatible with a lower average income for entrepreneurs than for age ployed. The key assumption behind this result is that the skill profiles in a population follow a Fréchet distribution. Thus, under this skill distribution, there is no “returns-to-entrepreneurship puzzle”. Using individual-based data from the Swedish employment register for 2004-8, we investigate empirical implications of our specification of the Lazear model. The results show that our assumption is reasonably well supported.

Keywords: entrepreneurship; occupational choice; self-owning; skill distribution; Fréchet distribution; entrepreneurship puzzle

JEL-codes: J24; J30; L26; M13

26 pages, First version: July 7, 2017. Revised: February 22, 2018.

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