A life-cycle model of entrepreneurial choice: Understanding entry into and exit from self-employment

Data from the 1979 cohort of the National Longitudinal Survey of Youth (NLSY79) show that self-employment (nonfarm or nonprofessional) accounts for as high as 7 percent of all yearly labor supplies by young white males (ages 20-39 in years 1979-2000). On the other hand, nearly 30 percent of individuals in the data have at least one year of experience as a self-employer in the covered years. The goal of this dissertation is to give a coherent framework that accounts for these two contrasting figures which together suggest the importance of understanding not only entry into but exit from self-employment as well. Specifically, I present and estimate a life-cycle model of entrepreneurial choice and wealth accumulation, using a subsample of white males aged 20 to 39 from the NLSY79. The model also includes two basic components of human capital (educational attainment and labor experience) aimed at a better capturing of the observed patterns of labor supply as well as those of income profiles and wealth accumulation over the life cycle. Counterfactual experiments with the use of the estimated model indicate that relaxation of borrowing constraints makes the average duration longer, especially for the non-college educated, while injection to business capital or to self-employment specific human capital only induces entries with short duration.