Potential Entrepeneurs and the Self-Employment Choice Decision

In this paper we estimate, on a dataset for the UK, a standard model of self-employment choice. The model is then extended to allow for differences in the potential for self-employment amongst employees. Specifically, we recognise four relevant groups: actual entrepreneurs, potential entrepreneurs, latent entrepreneurs, and non-entrepreneurs. This hypothesised division allows the incorporation of insights from the sociological and psychological literature on entrepreneurship, as well as the more usual economic and socio-demographic variables. The two models appear reasonably robust on statistical grounds. The predictive performance of the standard and sequential models is similar, although both models tend to under predict the number of self-employed. Nevertheless, we believe that the sequential model offers some distinct advantages over the standard model. In separating out the determinants of interest from the idea and firm formation decisions, the model identifies a set of characteristics that are necessary for start-up i.e. the factors determining interest, but which are not sufficient. In the standard model, the necessary and sufficient conditions are assumed to be identical. The results have implications for policy because they reveal a clear distinction between the factors governing interest in entrepreneurship and those influencing start-up from within the interested group.