Abstract

We use utility theory to investigate how entrepreneurs frame the decision to re-enter self-employment after experiencing firm failure. We suggest that in the context of re-entry individuals have valuable information regarding the return to their human capital in self-employment and factor this into their decision making. We develop hypotheses that incorporate this reduction in uncertainty regarding the returns to human capital in self-employment for predicting the likelihood that an individual re-enters self-employment after experiencing firm failure. We explain our results using utility theory and prospect theory and suggest that there are two types of entrepreneurs who re-enter after experiencing firm failure – those who make an informed choice based on the return to their human capital in self-employment and those who take the chance to ‘win back’ prior loses.

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