Slipping the Surly Bonds: The Value of Autonomy in Self-Employment

This paper models the tradeo¤ between increased autonomy from self-employment and the generally higher income that traditional employment o¤ers. While the demand for autonomy is a purely psychological construct, the economic tradeo¤s involved in its achievement are eminently amenable to quanti…cation and analytical modeling characteristic of economic analysis. We use this setup to o¤er a multifactor utility formulation formalizing the notion of an explicit, autonomy-based preference for self-employment. We propose that such a formulation as a theoretically-defensible alternative to the classic (and also psychologically-based) overcon…dence hypothesis in explaining why self-employment is chosen despite evidence that newly self-employed individuals earn less than comparable individuals who continue their current employment. Our model, founded on utility maximization by a rational individual, demonstrates not only that newly self-employed individuals are willing to accept lower earnings outcomes in exchange for psychic bene…ts from self-employment, but also that the structure of their optimal launch-timing decision guarantees that they will quit at a time such that their income will (at least initially) be reduced. We conclude with implications for the design of empirical instruments to quantify the relative importance of autonomy and income. 1 INTRODUCTION AND MOTIVATION This paper models the tradeo¤between increased autonomy from self-employment and the generally higher income that traditional employment o¤ers. Many new businesses fail shortly after inception (Baldwin, 1995; Dunne et al., 1988) and entrepreneurship is a career choice that does not, on average, o¤er improved …nancial remuneration compared to alternatives. Hamilton (2000) has shown that, except for the highest 25% of entrepreneurial incomes, remaining in a wage-producing