The Unobserved Returns from Entrepreneurship
UW La Follette School of Public Affairs 1225 Observatory Drive, Madison, Wisconsin 53706
press release: An assistant professor of management and human resources, Sarada will discuss her empirical study of the risk-return tradeoff faced by entrepreneurial households. The study provides an alternate perspective to a longstanding empirical puzzle: that most entrepreneurs persevere despite persistently low earnings and earnings growth.
Because entrepreneurial earnings are notoriously difficult to measure, instead of focusing solely on individual labor income, Sarada approaches the question from a household welfare angle. She looks at how the switch into self-employment corresponds to changes in reported earnings and hours worked at the individual level, and in expenditure and wealth at the household level.
Using longitudinal data from the Panel Study of Income Dynamics that spans 47 years, Sarada found that while individuals reported earning on average 26 percent less in self-employment, their household expenditure was 3.6 percent higher. This expenditure premium accrues over time with experience in self-employment and is not offset by lower savings, higher uncertainty, or longer work hours. Restricting the analysis to two subsamples: a) those with at least 16 years of schooling and b) those who go on to incorporate, yields the same qualitative results.