A Life-Cycle Model of Entrepreneurial Choice: Understanding Entry into and Exit from Self-Employment

Data from the 1979 cohort of the National Longitudinal Survey of Youth (NLSY79)show that self-employment (nonfarm and nonprofessional) accounts for as much as 7% of all yearly labor supplied by young white males (aged 20-39 in the period 1979-2000). On the other hand, nearly 30% of the individuals covered by the data have at least one year of experience as a self-employer in the relevant period. The goal of this paper is to develop a coherent framework that accounts for these two contrasting figures, which together indicate the importance of understanding not only entry into but also exit from self-employment. Specifically, I present and estimate a life-cycle model of

entrepreneurial choice and wealth accumulation, using a subsample of white males aged 20 to 39 from the NLSY79. In addition, the model includes two basic components of human capital (educational attainment and labor experience) aimed at better capturing the observed patterns of labor supply, as well as those of income profiles and wealth accumulation over the life cycle. Counterfactual experiments with the use of the estimated model indicate that relaxation of borrowing constraints increases the

average duration of self-employment, especially for the non-college-educated, whereas injections of business capital or self-employment-specific human capital only induce entries into self-employment that are of short duration.

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