Returns for Entrepreneurs vs. Employees: The Effectof Education and Personal Control on the RelativePerformance of Entrepreneurs vs. Wage Employees

How valuable is education for entrepreneurs’ performance as compared to employees’?What might explain any differences? And does education affect peoples’ occupationalchoices accordingly? We answer these questions based on a large panel of US labor forceparticipants. We show that education affects peoples’ decisions to become an entrepreneurnegatively. We show furthermore that entrepreneurs have higher returns to education thanemployees (in terms of the comparable performance measure ‘income’). This is the caseeven when estimating individual fixed effects of the differential returns to education for spellsin entrepreneurship versus wage employment, thereby accounting for selectivity intoentrepreneurial positions based on fixed individual characteristics. We find these resultsirrespective of whether we control for general ability and/or whether we use instrumentalvariables to cope with the endogenous nature of education in income equations. Finally, wefind (indirect) support for the argument that the higher returns to education for entrepreneursis due to fewer (organizational) constraints faced by entrepreneurs when optimizing theprofitable employment of their education. Entrepreneurs have more personal control over theprofitable employment of their human capital than wage employees....