Who Becomes an Entrepreneur? Labor Market Prospects and Occupational Choice

Why do some people become entrepreneurs (and others don't)? Why are firms so heterogeneous, and many firms so small? To start, the paper briefly documents evidence from the empirical literature that the relationship between entrepreneurship and education is U-shaped, that many entrepreneurs start a firm "out of necessity", that most firms are small, remain so, yet persist in the market, and that returns to entrepreneurship have a much larger cross-sectional variance than returns to wage work. Popular models of firm heterogeneity cannot easily account for the U-shape or for the persistence of low-productivity firms. The paper shows that these facts can be explained in a model of occupational choice between wage work and entrepreneurship where agents are heterogeneous in their ability as workers, and starting entrepreneurs face uncertainty about their project's productivity. Then, if agents' expected productivity as entrepreneurs is increasing and not too concave in their ability as workers, the most and the least able individuals choose to become entrepreneurs. This sorting is due to heterogeneous outside options in the labor market. Because of their low opportunity cost, low-ability agents benefit disproportionately from the ability to pursue only good business projects and abandon low-productivity ones. This also makes them more likely to immediately abandon a project for a new one. Data from the NLSY79 gives support to these two predictions. Individuals with relatively high or low wages when employed, or with a high or low degree, are more likely to be entrepreneurs or to become entrepreneurs, and spend more time in entrepreneurship. Among entrepreneurs, more of the firms run by individuals with low wages when employed, or with a low degree, are abandoned after only a year.occupational choice, entrepreneurship, firm entry, selection, search

Skill-Biased Change in Entrepreneurial Technology

In contrast to the very large literature on skill-biased technical change among workers, there is hardly any work on the importance of skills for the entrepreneurs who employ those workers, and in particular on their evolution over time. This paper proposes a simple theory of skill-biased change in entrepreneurial technology that fits with cross-country, historical and micro evidence. For this, it introduces two additional features into an otherwise standard occupational choice, heterogeneous firm model à la Lucas (1978): technological change does not benefit all potential entrepreneurs equally, and there is a positive relationship between an individual's potential payoffs in working and in entrepreneurship. If some firms consistently benefit more from technological progress than others, they stay closer to the frontier, and the others fall behind. Because wages rise for all workers, low-productivity entrepreneurs will then at some point exit and become workers. As a consequence, the entrepreneurship rate falls with income per capita, average firm size and firm size dispersion increase with income per capita, and "entrepreneurship out of necessity" falls with income per capita. The paper also documents, for two of the facts for the first time, that these are exactly the relationships prevailing in cross-country data. Quantitatively, the model fits the U.S. experience well. Using the parameters from a calibration to the U.S., the model also explains cross-country patterns quite well.occupational choice, entrepreneurship, firm size, firm entry, growth, skill-biased technical change

The regulation of entry and aggregate productivity

The aim of this paper is to contribute to explaining differences in aggregate productivity between similar, industrialized countries such as the US and European Union (EU) member states. By introducing shifts in administrative entry cost and a firm technology adoption decision in a model of heterogeneous firms close to Hopenhayn (1992), it matches the following facts: higher entry cost is associated with (1) both lower labor and total factor productivity, (2) more capital-intensive production, and (3) lower firm turnover. Compared to previous studies of reallocation intensity and aggregate productivity, endogenizing capital intensity through technology choice leads to stronger results; higher equilibrium capital intensity acts as an entry barrier to new firms, and protects low-productivity incumbents. Notably, the very small differences in the administrative cost of entry as documented by Djankov, La Porta, Lopez-de-Silanes and Shleifer (2002) suffice to explain 10 to 20% of differences in TFP and the capital-output ratio between Europe and the US. To obtain this, both heterogeneity of firms and allowing for technology choice are crucial.growth theory, aggregate productivity, technology adoption, firm dynamics, entry and exit, reallocation, selection, regulation of entry

"Entrepreneurs out of Necessity": A Snapshot

"Entrepreneurs out of necessity" identified by the Global Entrepreneurship Monitor survey are a sizeable group across countries. They tend to have low education, run smaller firms, expect their firms to grow less, but are likely to stay in the market. This evidence is a challenge for existing theories of heterogeneous firms.entrepreneurship, firm size

Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households

Trusting behavior has been shown to affect households' portfolio choice between risky and risk-free financial assets. We extend the analysis of the effect of trust on portfolio choice to include the dominant component of households' portfolios, real estate. In a simple model, we show how the effect of trust on expected investment returns affects portfolio composition, including the share of real estate. Using data from the European Social Survey, we estimate individual-level trust as an unobserved attitude using survey questions on personal attitudes by applying a hierarchical item response model. Combining these estimates with data on Spanish households' financial decisions from the Survey of Household Finances (EFF) conducted by the Bank of Spain, we show that households with less trust invest more in housing and less in financial assets, in particular risky ones. Trust thus may drive not only (limited) stock market participation, but financial development more generally.portfolio choice, trust, housing, item response models

Structural Change out of Agriculture: Labor Push versus Labor Pull

The process of economic development is characterized by substantial rural-urban migrations and a decreasing share of agriculture in output and employment. The literature highlights two main engines behind this process of structural change: (i) improvements in agricultural technology combined with the effect of Engel's law of demand push resources out of the agricultural sector (the "labor push" hypothesis), and (ii) improvements in industrial technology attract labor into this sector (the "labor pull" hypothesis). We present a simple model that features both channels and use it to explore their relative importance. We evaluate the U.S. time series since 1800 and a sample of 13 industrialized countries starting in the 19th century. Our results suggest that, on average, the "labor pull" channel dominates. This contrasts with popular modeling choices in the recent literature.growth, structural change

Tumor-mediated changes in the immune system of cancer patients - a balancing act between suppressors and effectors

Tumors and immune cells interact in many ways: immune cells can recognize and even kill tumor cells, while the tumor on the other hand can induce cells of the immune system to participate in tumor-mediated immune subversion. We studied immunosuppressive effects that human tumors exert on immune effector cells, particularly T cells, by inducing suppressive myeloid cells and decreasing T cell functional capacity. Increased numbers of myeloid-derived suppressor cells (MDSC) have been found in tumor-bearing individuals in response to cancer-derived factors. We characterized a CD14 + HLA-DR -/low MDSC population in patients with melanoma that could strongly suppress T cell function. Suppressive activity was dependent on cell-cell contact, arginase-1 expression, oxidative stress, and STAT3 signaling. Melanoma MDSC exhibited a mixed phenotype including markers of both mature and immature cells. Due to their monocyte-like characteristics, we wondered whether the presence of MDSC could interfere with the generation of monocyte-derived dendritic cells (DC) for vaccine use. We found that melanoma MDSC exerted a dose-dependent negative effect on DC quality. The removal of MDSC from monocytes prior to DC generation could therefore be advisable in order to improve vaccine efficacy in diseases where CD14 + HLA-DR -/low cells have been observed. Tumor-mediated immunosuppression has mostly been studied in patients with advanced cancer, thereby under-representing the group of early-stage cancer patients that should have a better chance to mount anti-tumor immunity and benefit from tumor immunotherapy. We found that even patients with early-stage breast cancer exhibit signs of tumor-induced immune modulation. Expression of the ζ-chain, an important transducer of activating signals in T and NK cells, was downregulated in patients compared with controls, but normalized after surgical tumor removal. Loss of ζ-chain expression was detectable in the blood, but strongest in the tumor, suggesting it to be mediated by tumor-derived factors. Further, circulating T cells of breast cancer patients were more differentiated than those of controls and exhibited signs of altered homing capacity. Tumor-associated T cells were dominated by effector memory cells that showed signs of activation, but were accompanied by indicators of immunosuppression. The findings presented here show that various mechanisms of tumormediated immunosuppression are active in patients with early- as well as late-stage cancers. Understanding such tumor-immune interactions is the first step towards the design and optimization of immunotherapeutic strategies for the treatment of cancer