The Properties of Income Risk in Privately Held Businesses

Our paper represents the first attempt in the literature to examine the properties and document the empirical stylized facts of income risk from privately held businesses in the US using a large panel. We employ a new, large, and confidential panel of US income tax returns for the period 1987-2009 to extensively characterize and quantify business income risks and to compare to labor income or earnings risks. We find that business income is much riskier than labor income, even conditional on a household's continued participation in private business endeavors. Compared to labor income, business income is less persistent, and it is characterized by higher probabilities of extreme upward or downward mobility. Furthermore, the distribution of business income risk has less mass in the middle and exhibits significantly thicker tails, compared to the distribution of labor income risk. Our data also suggest that high-income households are more likely to face the tail risks on both ends of the business income distribution. In addition, we provide evidence indicating that, from a lifetime perspective and taking into account the total resources at the household level, the choice to participate in private businesses may not be as big a puzzle as it has been previously thought