Those are the surprising findings of a new working paper by economists at the University of California at Berkeley and the London School of Economics. The researchers argue that merely being self-employed isn't a particularly good indicator of entrepreneurship, in the sense of taking big risks and mobilizing capital to create new goods and services. As the Harvard economist Edward Glaeser has observed, lumping the self-employed into a single category makes "little distinction between Michael Bloomberg and a hot-dog vendor." (click below to read more)
But things looked very different when the professors sorted the self-employed into those who were incorporated and those who were not, with the researchers regarding the former as the genuine entrepreneurs. While the self-employed in general earned less than the salaried, the incorporated made more money and were more likely to make a killing.
Relying on the 1973 National Longitudinal Survey of Youth and data from the Current Population Survey, the economists found that those who incorporated had higher aptitude-test scores as teens. As teens, they also engaged in more rule-breaking activities, including stealing, using marijuana and alcohol, drug dealing, violence and gambling. Indeed, their index of illicit activities was almost three times that of teens who went on to become salaried workers.
Despite these dubious youthful pursuits, the incorporated tended to come from stable, well-educated families with high incomes in 1979. These entrepreneurs were much more likely to be white, male and well-educated than were salaried workers or the unincorporated self-employed. In other words, incorporated entrepreneurs may be likelier to cross home plate with the winning run, but they're also likelier to have been born on third base.
"Smart and Illicit: Who Becomes An Entrepreneur And Does It Pay?" Ross Levine and Yona Rubinstein, National Bureau of Economic Research Working Paper 19276 (August)
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