The Economic Returns to Entrepreneurship – Implications for Stimulating Entrepreneurship

Abstract

Recent evidence comparing earnings from entrepreneurship versus wage earning shows that, after allowing for obvious observable differences, most entrepreneurs in most developed countries earn less than similar wage-earning employees. Does this mean that the decision to become an entrepreneur should be discouraged? The answer depends in part on whether we believe that entrepreneurs report their income truthfully or not. Adjusting for what is considered to be underreporting by entrepreneurs lifts entrepreneurial earnings by between 10% and 40%, reversing the fortunes of the entrepreneur such that they appear to be earning much more than their counterparts in a wage-earning job. If this adjustment should prove to be appropriate, then there is no obvious reason to increase the incentive for individuals to become entrepreneurs (such as with tax breaks or direct start-up subsidies) in developed countries, and there is reason, instead, to discuss decreasing these subsidies