Confronting Economic Theory with Empirical Practice
Chapter 7: Human Capital
Introduction To stimulate the further development of entrepreneurs, policy makers have, for instance, implemented entrepreneurship stimulation programmes in schools, and have made several subsidies and support services available for start-ups and small ﬁrms. However, the question remains in which way optimal stimulation of entrepreneurial performance can be achieved. There is one factor that both academic scholars and policy makers see as an important determinant of entrepreneurial performance, namely human capital. It is the topic of this chapter. The correct measurement of the magnitude of the returns to human capital is therefore of the utmost importance to devise and implement eﬀective policies. However, a recent meta-analysis (van der Sluis et al., 2003) reveals that the eﬀect of formal schooling, one of the most prominent manifestations of human capital, on entrepreneurial performance has not yet been measured consistently. This is due to shortcomings in the empirical strategies applied so far. Previous studies measuring the relationship between education and entrepreneurial performance merely measure (conditional) correlations rather than causal eﬀects. No attempt has yet been made to apply identiﬁcation strategies such as instrumental variables (IV), twins studies and the like in order to estimate causal eﬀects that are not biased due to the neglect of unobserved heterogeneity and the endogenous nature of the decision to invest in schooling. My aim is to measure the returns to education (RTE) for entrepreneurs and relate its magnitude to the RTE for employees. To this end, I shall estimate the RTE for both...
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