Experimentation and the Returns to Entrepreneurship

Previous studies have argued that entrepreneurs earn less and bear more risk than salaried workers with otherwise similar characteristics. In a simple model of entrepreneurship, I show that estimates of mean and variance of returns to entrepreneurship used by these previous studies are biased, as they fail to account for the option value of experimenting with new ideas. Using longitudinal data, I find patterns that are consistent with entrepreneurship as experimentation and returns to entrepreneurship that are more attractive than established by previous research. I thank Daniel Ferreira, David Levine, Ross Levine, Ulrike Malmendier, Robert Marquez, Adair Morse, Matt Rhodes-Kropf, David Sraer, Toby Stuart, and Annette Vissing-Jorgensen for helpful comments. Haas School of Business, University of California at Berkeley, 545 Student Services Building #1900, Berkeley, CA 94720 (e-mail: [email protected]).