Abstract

It is expected that individuals are attracted to business ownership because of higher expected earnings relative to paid employment; earnings in paid employment can thus be viewed as an opportunity cost of entrepreneurship. In fact, several studies have found that individuals with relatively low wages are the ones more likely to become self-employed. However there may be a mismatch between latent entrepreneurs’ expected utility from business ownership and their effective earnings once they become business owners. Some explanations for this mismatch are provided by the literature, including unrealistic optimism in anticipating earnings growth (Lowe and Ziedonis, 2006); non-pecuniary benefits of self-employment (Hurst and Lusardi, 2004); and matching skills/human capital (Lazear, 2005). Our aim is to examine the impact on individuals’ incomes of switching from paid employment to business ownership.

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