Entrepreneurial Human Capital and Entrepreneurial Dynamics: Evidence from a Natural Experiment∗

This paper tests a model in which entrepreneurship-specific human capital accumulation through learning-by-doing is the key factor behind entrepreneurial dynamics. I derive testable predictions of the theory that allow it to be distinguished from alternatives. I then exploit the 1997-98 Indonesian financial crisis as a natural experiment that provides exogenous variation in entry into self-employment amongst a relatively high-ability cohort of individuals. Consistent with the model of human capital accumulation, entrepreneurial activity is robustly persistent, and the dynamic improvement in returns exceeds what could be reasonably expected in the absence of skill accumulation.