Entrepreneurship and Financial Incentives of Return, Risk, and Skew

Peter Berkhout, Joop Hartog, Mirjam van Praag*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We focus on the role of the opportunity cost in the choice for entrepreneurship in favor of wage employment, that is, the wages given up as an employee. We argue that just like outside observers, potential entrepreneurs will face great difficulty to predict their earnings from entrepreneurship. The focus on earnings forgone may help to solve the lack of robust empirical support for the effect of financial incentives on the decision to become an entrepreneur. We find, consistent with standard theory, that a higher mean, lower variance, and higher skew in the relevant wage distribution reduce the likelihood of entrepreneurship.

Original languageEnglish
Pages (from-to)249-268
Number of pages20
JournalEntrepreneurship: Theory and Practice
Volume40
Issue number2
DOIs
Publication statusPublished - 1 Mar 2016
Externally publishedYes

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