Sunday, October 11, 2009: 11:45 AM
Kameliia Petrova, Ph.D.
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Economics and Finance, State University of New York–Plattsburgh, Plattsburgh, NY
Why do people become part-time entrepreneurs? Are they financially constrained? What sectors do they choose? Early studies on entrepreneurship do not deal with part-timers. Instead, they use self-employment as a proxy for entrepreneurship, and focus on the selection into self-employment and the effect of different factors on it. These studies employ data from labor market surveys that treat respondents as either self-employed or wage workers and that do not allow the two groups to overlap. Do we have to worry about part-time entrepreneurs then? Recent evidence from a large cross-national study on the level of entrepreneurial activity of 40 countries (Global Entrepreneurship Monitor, 2003 Executive Report) has established that 80 percent of those who implement start-ups also hold outside paid jobs. These findings conflict with the theories of entrepreneurial choice in which individuals choose only between outside paid jobs and self-employment, and in which the complexity of entrepreneurial activity is not reflected. To explain part-time entrepreneurship, I develop a model of entrepreneurial choice where one can hold an outside paid job while also being involved in a start-up. Individuals become part-time entrepreneurs because they do not know their entrepreneurial ability ahead of time. Initially, they would prefer to spend only a fraction of time in entrepreneurship without the risk of starving if their ability turns out to be low. Based on their expectations, entrepreneurs choose how much time to spend in business and how much capital to invest. They will receive a signal about their entrepreneurial ability that is proportional to the time spent in the start-up and will make a decision about what to do next. Better entrepreneurs manage to transform their start-ups into successfully operating businesses; those with lower entrepreneurial ability withdraw. The model gives rise to industry selection, predicting that more part-time entrepreneurs would be observed in sectors where ability is unknown ahead of time. This implication of the model agrees with the empirical evidence and some of the patterns observed in the Panel Study of Entrepreneurial Dynamics (PSED). The PSED is an extensive nationally representative survey of the establishment of new businesses reporting that 50 percent of entrepreneurs have full-time work and 20 percent have part-time wage and salary work outside the start-ups. In addition, there is evidence that the number of part-time entrepreneurs is disproportionately high in sectors such as manufacturing; professional, scientific, and technical services; and information. The opposite holds for agriculture; construction; transportation; and art and entertainment.
