The entrepreneurial earnings puzzle: Mismeasurement or real?

• Published in: Journal of business venturing 2014-01, Vol.29 (1), p.88-105
• Main Authors: Åstebro, Thomas, Chen, Jing
• Format: Article
• Language: English
• Subjects: Business administration; domain_shs.gestion.strat; Earnings; Entrepreneurs; Entrepreneurship; Estimating techniques; Humanities and Social Sciences; Income underreporting; Returns; Studies; Wage differential
• ISSN: 0883-9026; 1873-2003
• DOI: 10.1016/j.jbusvent.2013.04.003

A review of recent evidence on relative earnings from entrepreneurship versus wage work presents a puzzle: why do individuals become entrepreneurs when entrepreneurs on average apparently earn less than employees? After considering several potential explanations, we empirically analyze one: income underreporting by entrepreneurs. Using a nationwide panel survey representing U.S. households over 15years, we estimate that entrepreneurs on average earn 4% less per year than employees. However, after correcting for income underreporting, the mean financial gain to entrepreneurship is positive and large, greater than 42%. However, we show that this estimate is built on some unpalatable model assumptions. •Review of the empirical evidence on the monetary gain to entrepreneurship.•Review of theories that may explain empirical findings.•Empirical analysis of income underreporting by entrepreneurs.•Typical result that entrepreneurs on average earn less than employees reversed when adjusting for income underreporting.•Results however sensitive to model assumptions.