Abstract
We investigate whether the start-up motive is related to the entrepreneur’s earnings, and whether the relationship between the entrepreneur’s business tenure (i.e., the time the entrepreneur is running the business) and his earnings depends on the start-up motive. We employ a unique longitudinal data base providing information on start-up motive and earnings for 7902 entrepreneurs in the EU-15 countries, where 12 different start-up motives are distinguished. We classify these 12 motives in three broad categories of opportunity, necessity and other start-up motives. Our analysis shows that, first, earnings of necessity entrepreneurs are significantly lower than those of opportunity entrepreneurs, irrespective of the type of necessity motive. Second, these differences remain rather stable over the course of the entrepreneur’s business tenure, i.e., these differences are of a permanent nature. Third, we do not find evidence for earnings differences within the broad category of necessity entrepreneurs (i.e., between the different types of necessity motives).
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Notes
In reality, firm age and business tenure will coincide in the vast majority of cases. However, when the entrepreneur joins a partnership type of firm or buys an existing firm, business tenure will be lower than firm age.
As most self-employed run (very) small businesses, most observations in our sample also refer to (very) small businesses.
The ECHP data are used with the permission of Eurostat (contract ECHP/2006/09, held with the Universidad de Huelva).
Sweden was excluded from our analysis because this country presented missing values for several relevant variables.
Full-time self-employed are defined as individuals working at least 30 h per week.
Since we will test for second and third order polynomials of business tenure, we will perform a Chow test on the linear and squared tenure variables for the second order polynomial, and a Chow test on the linear, squared and cubic tenure variables for the third order polynomial.
Other performance measures are quite rough for these purposes. Thus, ‘survival of the entrepreneur’s business’ seems less appropriate since marginal entrepreneurs hanging on year by year cannot be distinguished from really successful ones. Similarly, ‘job creation’ also seems less accurate since entrepreneurs may postpone the decision to take on employees even if they learn fast and earn enough to employ personnel. In addition, our data set only allows us to study job creation by own-account workers, which would leave the important group of employers (self-employed with employees) outside the analysis.
Obviously, the entrepreneurs in our sample report incomes earned in the year prior to the interview. Therefore, all explanatory variables are 1-year lagged in order to avoid timing mismatch with earnings when running earnings equations.
Family circumstances include marriage; child birth/need to look after children; and ‘partner’s job required move to another place’.
Other reasons include looking after old, sick, disabled persons; study, national service; own illness or disability; ‘wanted to retire or live off private means’; or other reasons.
We also tested for a fourth order polynomial by including quartic business tenure, but this variable was not significant.
Another difference with the quadratic specification is that, after a second turning point (reached after 16 years), earnings increase again with business tenure.
Alternatively, we could have used one big model where all independent and control variables would be interacted with all start-up motive dummies. However, this model suffered from multicollinearity, witness high variance inflation factors (VIFs). Our preferred model does not suffer from multicollinearity; see Table 4, where all VIFs are below 2.
We also performed the Chow tests for the second order polynomials where each of the seven regressions from Table 5 included linear and squared business tenure variables only. Also here, none of the three tests was significant, with Chow-test p-values of 0.2292, 0.4353 and 0.7362.
In particular, coefficients for the linear, squared and cubic business tenure terms were 0.3857 (t-value 5.89), −0.0375 (t-value −5.27) and 0.0011 (t-value 4.81), respectively, where the estimation sample included 7152 entrepreneurs, i.e., 750 early exiters were removed from the sample. Full results are available on request.
In addition, an important distinct group is formed by entrepreneurs who simultaneously have opportunity and necessity motives (Caliendo and Kritikos, 2009).
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Acknowledgements
The authors acknowledge funding from the Spanish Ministry of Economy and Competitiveness (Ana Millán under project ECO2013-48496-C4-4-R, and José María Millán and Concepción Román under project ECO2013-43526-R).
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van Stel, A., Millán, A., Millán, J.M. et al. The relationship between start-up motive and earnings over the course of the entrepreneur’s business tenure. J Evol Econ 28, 101–123 (2018). https://doi.org/10.1007/s00191-017-0499-3
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DOI: https://doi.org/10.1007/s00191-017-0499-3