Essays in Entrepreneurship

Abstract

My dissertation concentrates on the determinants of entrepreneurship and consists of two essays. The first essay develops a dynamic model of occupational choices to capture how big-five personality traits influence entrepreneurial decisions and returns. More importantly, I divide entrepreneurs into incorporated and unincorporated to differentiate between high-growth and lifestyle entrepreneurs. I use the Household, Income, and Labour Dynamics in Australia (HILDA) data set for this study. My model captures the role of personality traits, cognitive ability, human capital, information accumulation, and non-pecuniary benefits in entrepreneurial dynamics. The estimated model demonstrates that personality traits affect pecuniary and non-pecuniary incorporated and unincorporated entrepreneurs differently. For example, extroverted individuals have the highest returns in incorporated businesses but prefer to be unincorporated. I use the estimated model to evaluate several subsidies for incorporated businesses: subsidy for starting an incorporated business for the first time, subsidy for incorporated entrepreneurs at the beginning of the second year, and subsidy targeting potential young and productive individuals. The first subsidy primarily affects the entry margin and attracts more but less productive individuals. In contrast, the second policy mainly affects the exit margin and does not change the distribution of individuals' characteristics. Both these subsidies have returns lower than one. Finally, the last subsidy has a return of around 2.5 AUD for every AUD invested, and it attracts more productive incorporated entrepreneurs to try incorporated businesses. The second essay studies the firm size and transitions in and out of self-employment. Small-firm workers are almost three times as likely to become self-employed as large-firm workers and the self-employed are twice as likely to transition into small firms versus large firms. What explains these unbalanced dynamics between sectors? We use Australian data from 2001 to 2019 to estimate a dynamic structural model that captures the role of human capital, discovering one's sector-specific abilities, and non-pecuniary motivations on self-employment dynamics. Notably, capturing differences in the human capital and information accumulated across sectors, the model allows for experience from one sector to have different returns in another, and it also allows for signals drawn in one sector to update one's beliefs about ability in another sector. We find that the main drivers explaining the differential transitions into and out of self-employment from small firms are own-sector returns to experience and transition preferences.