Entrepreneurship and Financial Incentives of Return, Risk and Skew

In this forthcoming article, accepted by Entrepreneurship Theory and Practice, Mirjam van Praag and her co-authors are dealing with the role of expected income as a motivator for entrepreneurs.

The authors 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. They 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. The article states, consistent with standard theory, that a higher mean, lower variance, and higher skew in the relevant wage distribution reduce the likelihood of entrepreneurship.

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