Frontiers of Entrepreneurship Research
1997 Edition

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RISK, RETURNS AND SELF-EMPLOYMENT: THEORY AND EVIDENCE FOR THE US AND UK 

Simon C. Parker

University of Durham
England

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Principal Topics

The paper attempts to explain the widely differing experiences of the US and the UK with regard to aggregate self-employment since the mid-1960s. I model the decision to become self-employed when agents possess differing amounts of innate entrepreneurial ability; when agents are committed to their occupation for a given finite time; and when returns in self-and paid-employment are uncertain.

Method

Aggregate US and UK data are taken from the OECD, IMF and Datastream. The model is estimated using a two-stage estimation procedure. At the first stage, least squares learning about the model's dynamic stochastic income process is estimated; these estimates are used in the non-linear regression analysis of the second stage. The effects of risk and returns on entrepreneurship are gauged in both the US and the UK, and entrepreneurial attitudes to risk in both economies are also estimated.

Major findings

Between 1965 and 1992, risks and returns play a key role in explaining aggregate self-employment in the UK; relatively high risk aversion is observed. In contrast, the degree of risk aversion is found to be indistinguishably different from zero in the US, suggesting that expected relative returns and income growth rates in paid- and self-employment, but not risks, determine aggregate American self-employment. In both economies, sensitivity analyses were also performed by testing the significance of additional explanatory variables over and above those predicted by the model.

Implications

To the extent that governments wish to promote self-employment (as in the last 18 years in the UK), they should recognise the importance of risks as well as returns when making policies for the UK economy. For the US, policies which focus on returns and expected income growth rates would seem to be most effective.

 

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