Confronting Economic Theory with Empirical Practice
Chapter 4: Risk Aversion and the Choice for Entrepreneurship
4 Risk aversion and the choice for entrepreneurship 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...
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