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CEP discussion paper
Selection into entrepreneurship and self-employment
Ross Levine and Yona Rubinstein
October 2020
Paper No' CEPDP1722:
Full Paper (pdf)

JEL Classification: L26; J24; G32; E32

Tags: entrepreneurship; human capital; occupational choice; corporate finance; business cycles

We study the effects of ability and liquidity constraints on entrepreneurship. We develop a three sector Roy model that differentiates between entrepreneurs and other self-employed to address puzzling gaps that have emerged between theory and evidence on entry into entrepreneurship. The model predicts—and the data confirm—that entrepreneurs are positively selected on highly-remunerated cognitive and non-cognitive human capital skills, but other self-employed are negatively selected on those same abilities; entrepreneurs are positively selected on collateral, but other self-employed are not; and entrepreneurship is procyclical, but self-employment is countercyclical.