Successful Entrepreneurship
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Successful Entrepreneurship

Confronting Economic Theory with Empirical Practice

C. Mirjam van Praag

Mirjam van Praag compares and contrasts the economic theory of entrepreneurship with determinants of successful entrepreneurship derived from empirical evidence, in an attempt to discover what makes for an accomplished entrepreneur. The author’s state-of-the-art historical, theoretical and empirical research on successful entrepreneurship – all from an explicit economic perspective – comprehensively addresses questions such as: ‘What are the factors that influence individuals’ decisions to start a business venture as opposed to working as an employee?’ and ‘What are the individual characteristics that make one successful as an entrepreneur?’ thereby supporting or dispelling various existing myths. Individual factors contributing to the success of entrepreneurs that are considered include, amongst others, human capital, financial capital and psychological traits. The importance of such factors for the various phases of entrepreneurship, including start-up, delivery and performance is also measured.
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Chapter 4: Risk Aversion and the Choice for Entrepreneurship

C. Mirjam van Praag


Introduction It is common knowledge that the rewards of entrepreneurship are more variable and less certain than the wages of employment. This stylized fact has been based on substantial empirical support (for instance in de Wit, 1993). A logical consequence should be that individuals with a relatively low degree of risk aversion are more likely to opt for entrepreneurship as opposed to wage employment. This view was held by classic authors like Cantillon (1755), Say (1803) and Knight (1921). More recently it has surfaced in models of occupational choice by Kanbur (1979), Kihlstrom and Laffont (1979) and Blanchflower and Oswald (1998). Nevertheless, this widely accepted effect of risk aversion discouraging people from entrepreneurship has never been put to an empirical test. I assume that this omission is mainly due to a lack of sample surveys in which a direct individual measure of risk aversion (and entrepreneurship history) is recorded.1 In this chapter I discuss the results from a first attempt to fill this gap by means of a sample survey constructed for this purpose (second section). It contains sufficient information of occupational histories of approximately 1700 individuals along with their evaluations of a specified lottery and other explanatory variables. The answers to the lottery evaluation result in a snapshot proxy of individual attitudes towards risk. From this, we derive from utility theory an empirical measure of both absolute risk aversion as well as relative risk aversion (third section). These empirical measures are subsequently inserted into...

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