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Berkhout, Peter
Hartog, Joop
van Praag, Mirjam
Year of Publication: 
Series/Report no.: 
Tinbergen Institute Discussion Paper 11-165/3
There is no robust empirical support for the effect of financial incentives on the decision to work in selfemploymentrather than as a wage earner. In the literature, this is seen as a puzzle. We offer a focus on theopportunity cost, i.e. the wages given up as an employee. Information on income from self-employment is ofinferior quality and this is not just a problem for the outside researcher, it is an imminent problem of theindividual considering self-employment. We also argue that it is not only the location of an incomedistribution that matters 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 employment segment reducethe inclination to prefer self-employment above employee status. Using a sample of 56,000 recent graduatesfrom a Dutch college or university, grouped in approximately 120 labor market segments, we find significantsupport for these propositions. The results survive various robustness checks on specifications andassumptions.
income distribution
income risk
income skew
income variance
occupational choice
labor market entry
labor market segments
opportunity cost
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Working Paper

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