Seminar Paper:

What Characterizes Entrepreneurs and

Individuals in Self-Employment?

An Overview of Empirical Studies

Author: Christoph Siemroth

Course: Entrepreneurship

University of Helsinki

Spring Term 2009

Christoph Siemroth

Table of Contents

1. Introduction 1

2. What Might Influence the Choice of Becoming Entrepreneur? 1

2.1. Attitude Towards Risk: Less Risk Aversion 1

2.2. Social Factors 2

2.3. Liquidity Constraints 4

2.4. Unattractiveness as Employee 5

2.5. Income 6

2.6. Age 7

3. Summary 8

List of References 9

Table of Contents

Christoph Siemroth

1. Introduction

This paper reviews some empirical studies on entrepreneurship on the level of the individual and

identifies factors influencing his occupational choice of becoming self-employed or an employee.1

The goal is to find representative characteristics of an entrepreneur. Therefore, several traits or

prerequisites that might be expected to influence the propensity to become entrepreneur are ana-

lyzed, their empirical relevance is evaluated and reasons or explanations for the findings are dis-

cussed. Given the formal confinements of this paper, the overview can by no means be exhaustive,

but it nonetheless endeavours to reveal the most basic determinants that characterize entrepreneurs

in comparison to employees.

2. What Might Influence the Choice of Becoming Entrepreneur?

2.1. Attitude Towards Risk: Less Risk Aversion

Being an entrepreneur, by definition, is a risky occupational choice: Survival of the entrepreneurial

endeavour and the future income is uncertain. Most analytic economic papers dealing with entre-

preneurship include some uncertainty in their models. For example, in Ilmakunnas/Kanniainen

(2001: 199ff.) entrepreneurs face

uncertainty about the state of the future market

(on which the

future entrepreneurial income depends) and Kanniainen/Poutvaara (2007: 5ff.) incorporate

risk of
project-failure

in their model, as do De Meza/Webb (1999: 155ff.). There are also several empirical

studies finding earnings of self-employed persons to have a higher variance than the earnings of

employees (Ekelund et al. 2005: 651). Given this, we can safely assume that being an entrepreneur

is more risky than being an employee. Therefore, ceteris paribus, less risk averse (or more risk seek-

ing) individuals should more likely be entrepreneurs (ibid.: 651).

Ekelund et al. (2005) investigated with psychological test data whether or not risk aversion

has a significant effect on the occupational choice (self-employed or employee). They used data

from questionnaires of a population of Finnish citizens born in the same year (1966) in a geographi-

cally defined area, so there is relatively high cultural homogeneity in the sample. The data has been

collected in various stages of the subjects′ lives until the age of 31. It consisted of important socio-

economic variables such as labour market history and education (ibid.: 652).

The empirical analysis revealed that their risk aversion measure ("harm avoidance") is in fact

significantly lower (p=0.0001) for self-employed individuals than for employees (ibid.: 655). En-

dogeneity could be ruled out and so they conclude that the "risk aversion measure has a significant

and economically relevant effect on the probability of an individual being self-employed" (ibid.:

1 Being self-employed and being entrepreneur is used interchangeably.

1