HEC Research Papers Series,
HEC Paris

Abstract: Recent evidence on relative earnings from entrepreneurship versus wage work shows that after controlling for observable differences, entrepreneurs in most developed countries on average apparently earn less than employees. Does this mean that the choice of entrepreneurship should be encouraged or discouraged? The answer depends in part on whether one believes that entrepreneurs report their income truthfully or not. Adjusting for what is considered underreporting by entrepreneurs using observed differences in expenditures lifts entrepreneurial mean earnings by between 10 percent and 40 percent, reversing the above mentioned negative difference into a positive difference. If this adjustment result continues to hold in further analysis, there is no a priori reason to increase the support of entrepreneurs in developed countries, and one should discuss decreasing it.

Keywords: Entrepreneurship; returns; income underreporting; public policy

JEL-codes: J23; M13

10 pages, May 1, 2013

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