Who becomes an entrepreneur? Labor market prospects and occupational choice

This paper provides new theory and evidence on the relationship between ability and entrepreneurship. I show that there is a U-shaped relationship between the probability of entrepreneurship and both a person's schooling and wage when employed. This pattern can be explained in a model of occupational choice between wage work and entrepreneurship where a firm's productivity is uncertain before entry, potential wages are heterogeneous, and expected productivity is positively related to an entrepreneur's potential wage. Search, or the ability to keep good projects and reject bad ones, attracts low-ability agents into entrepreneurship. The model also explains why low-profit firms do not always exit.