How risky is business ownership?

This paper provides dynamical earnings comparison between business owners and wage earners. Transitions into and out of business ownership are analyzed along with their implications for earnings. Starting one’s own business is associated with both a high chance of early failure and a high likelihood of rapid downward income mobility. As a result, in the short run, business ownership is carries significant risk of downward income mobility making it not rewarding when compared to wage work. However, this penalty is recovered in the long run. In the long run, both current and past business owners have higher chances of ending up in the upper tail of the income distribution. Thus, the long-term effects of business ownership are strictly positive, regardless of business’ success.