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Income, Uncertainty and the Probability of Self-Employment

Published online by Cambridge University Press:  17 August 2016

Friedhelm Pfeiffer  and
Winfried Pohlmeier
Friedhelm Pfeiffer
Affiliation:
Universität Mannheim
Winfried Pohlmeier
Affiliation:
Universität Mannheim
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Summary

This paper aims at investigating the determinants of self- employment within a structural model of discrete choice under uncertainty. The basic idea of our approach centres around Knight's (1921) famous view of entrepreneurs receiving risk-adjusted income that has to exceed the income of employees because of the greater variance of the income stream. Unlike previous econometric approaches, which use reduced form specifications that are more or less based on ad-hoc reasoning, we derive a choice equation of which the parameters have a clear interpretation in terms of the parameters of the underlying von Neumann-Morgenstern utility function. The specification allows to identify how the difference in income risk between wage-employment and self- employment enters the choice equation without approximating the risk difference via a reduced form specification. The model is estimated using a random effects panel probit estimator with unrestricted autocorrelation structure. Estimates are based on a balanced panel of 1,926 working men selected from the West German Socio-Economic Panel 1984 to 1989.

Résumé

Résumé

Le but de cet article est d'analyser les déterminants du travail indépendant dans un modèle structurel de choix discret dans un contexte d'incertitude. Notre approche est basée sur l'idée bien connue de Knight (1921), selon laquelle le revenu ajusté pour le risque des entrepreneurs doit dépasser la rémunération des employés en raison de la plus grande variance de leur flux de revenu. Alors que d'habitude les modèles économétriques s'appuient sur des spécifications plus ou moins ad hoc, nous dérivons une équation de comportement dont les paramètres sont directement interprétables à partir de la fonction d'utilité von Neumann-Morgenstern sous-jacente. Cette spécification permet de mesurer dans quelle mesure la différence aléatoire de revenu entre l'emploi salarié et le travail indépendant est incorporée dans l'équation de comportement sans que cette différence ne soit préalablment appéhender par une spécification de forme réduite. Le modèle est estimé en utilisant, sur des données en panel, un estimateur probit aléatoire à structure autocorrélée non restreinte. Les estimations sont basées sur un échantillon représentatif de 1926 travailleurs issus de donées socio-économiques ouest-allemandes pour le période 1984-1989.

Keywords

C33C35J24C33C35J24
Type
Part I: Labour Demand and Supply
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 58 , Issue 3-4: Output and Employment Fluctuations , 1992 , pp. 265 - 281
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1992 

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Footnotes

(*)

For helpful comments we would like to thank Axel Börsch-Supan, François Laisney, Jörn-Steffen Pischke, Sikandar Siddiqui as well as three anonymous referees. Bettina Burger and Donald DeVault provided qualified research assistance. Our special thanks go to Michael Lechner for his panel estimation programme. The authors gratefully acknowledge financial support by the Deutsche Forschungsgemeinschaft. The usual disclaimer applies.

References

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