Document Type

Dissertation

Degree

Doctor of Philosophy (PhD)

Department

Economics

First Advisor's Name

Peter Thompson

First Advisor's Title

Committee Chair

Second Advisor's Name

Cem Karayalcin

Third Advisor's Name

Jesse Bull

Fourth Advisor's Name

Jie Mi

Keywords

Entrepreneurship, Overconfidence, Income Underreporting, Self-Employment, Income Transitions, Limiting Income Deistributions

Date of Defense

10-3-2011

Abstract

This dissertation analyzes rewards and motivations of self-employment. In light of recent research contributions of Barton Hamilton (2000), which find entrepreneurship not as financially rewarding as wage work, my dissertation attempts to both verify and explain this claim. The first essay proposes a theoretical model of evolution of erroneous earnings expectations on part of a nascent entrepreneur. Inability to observe, survey, and take into account all of the returns to entrepreneurship prior to business entry creates a biased set of beliefs on part of the potential entrants. Using Bayesian learning, a nascent entrepreneur starting out with correct perception of profit distribution arrives at erroneous beliefs by incorporating limited information collected from existing businesses. An observed distribution of surviving businesses would exhibit higher earnings because of previous, unobserved, business failure entrepreneur get an overly positive view of her profit potential. Hence, the chapter offers a unique method of modeling overconfidence.

The second essay undertakes dynamic empirical comparison of earnings received by business owners and their wage counterparts. Using Survey of Income and Program Participation (SIPP) I examine both short and long run returns to entrepreneurship comparing theses rewards to wage earners returns. I pay particular attention to transitions into and out of business ownership. I estimate entire earnings distribution. To characterize dynamic aspect of changes to individuals’ earnings I split the income distribution into five income quintiles and follow survey participants over the period of seven years. I find that period-to-period transitions to be Markovian. I find business tenure to be short, business ownership is costly in the short and rewarding in the long run.

The third essay considered different reporting schemes applied to the self-employed. It is another empirical investigation of entrepreneurial earning uses Panel Study of Income Dynamics (PSID). I find entrepreneurs while reporting lower than wage workers earnings enjoy significant consumption premiums. I observe evidence of income underreporting by entrepreneurs. This finding suggests a need for better earning comparison metrics and proposes to use consumption rather than income metrics for future comparisons.

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