PhD Lunch Seminars Amsterdam

Piotr Denderski (VU University Amsterdam)
Tuesday, 8 December 2015

Should young people be encouraged to become entrepreneurs? The theory of occupational choice of Miller (1984) prescribes experimenting with more uncertain jobs at the early stage of career for the sake of fast identification of one’s comparative advantages. According to the theory, there is value of learning even in the case of entrepreneurial failure. However, entrepreneurs keep on running under-performing businesses, not switching to payroll jobs which puts entrepreneurial learning in question. I argue it is the more complex “jack of all trades” nature of entrepreneurship that impedes learning. In my model, income of employees depend only on their ability while entrepreneurial income depends jointly on the ability and the business acumen. Both the factors are uncertain and agents learn about them through noisy production. Entrepreneurial income provides one signal on two unobservables. Entrepreneurs who overestimate their acumen assign a fraction of disappointing performance to their ability which may lead to postponing the termination of their business. The confounding of ability and acumen is the stronger, the more uncertain agents are about their ability. The model prescribes reducing uncertainty about the ability of young workers through better education policies as a way to improve entrepreneurial selection.