NCPA - National Center for Policy Analysis

Wealth, Tastes, and Entrepreneurial Choice

October 28, 2015

A study presents a simple static model of small business entry with selection on the nonpecuniary benefits of small business ownership. The key element in the model is that individuals differ in their preference for owning a small business.

The model assumes that capital is not needed to start a new business. As a result, there is no role for liquidity constraints to affect small business entry. The study also finds that:

  • Nearly 50% of small business owners report that non-pecuniary benefits were one of the primary reasons that they started their business.
  • The reasons included wanting to be their own boss, tired of working for others, wanting flexibility to set own hours, or wanting to pursue their passion.
  • Many of those business owners report having no desire to grow their business and to have at most a few employees.
  • Very few firms in the skilled craftsmen industries will ever grow beyond their small size and earnings will be lower for those who run a small business.

By identifying non-innovative businesses that would prefer to remain small, it is easier to focus on businesses focused on growth or innovative risk-taking. This would entice productive entrepreneurs with high wage employment opportunity costs to innovate and create jobs.

Source: Erik G. Hurst and Benjamin W. Pugsley. "Wealth, Tastes, and Entrepreneurial Choice" Federal Reserve Bank of New York, October 2015.


Browse more articles on Economic Issues