It’s the Opportunity Cost, Stupid!How Self-Employment Responds to FinancialIncentives of Return, Risk and Skew

There is no robust empirical support for the effect of financial incentives on the decision towork in self-employment rather than as a wage earner. In the literature, this is seen as apuzzle. We offer a focus on the opportunity cost, i.e. the wages given up as an employee.Information on income from self-employment is of inferior quality and this is not just aproblem for the outside researcher, it is an imminent problem of the individual consideringself-employment. We also argue that it is not only the location of an income distribution thatmatters and that dispersion and (a)symmetry should not be ignored. We predict that highermean, lower variance and higher skew in the wage distribution in a particular employmentsegment reduce the inclination to prefer self-employment above employee status. Using asample of 56,000 recent graduates from a Dutch college or university, grouped inapproximately 120 labor market segments, we find significant support for these propositions.The results survive various robustness checks on specifications and assumptions....