Smart rule-breakers make the best entrepreneurs
By Adam Millsap of the Mercatus Center at George Mason University. Excerpts:
"A new paper in the Quarterly Journal of Economics (working version here)
finds that the combination of intelligence and a willingness to break
the rules as a youth is associated with a greater tendency to operate a
high-earning incorporated business as an adult i.e. be an entrepreneur.
Previous work examining entrepreneurship that categorizes all
self-employed persons as entrepreneurs has often found that
entrepreneurs earn less than similar salaried workers. But this
contradicts the important role entrepreneurs are presumed to play in
generating economic growth. As the authors of the new QJE paper remark:
“If the self-employed are a good proxy for risk-taking,
growth-creating entrepreneurs, it is puzzling that their human capital
traits are similar to those of salaried workers and that they earn
less.”
So instead of looking at the self-employed as one group, the authors
separate them into two groups: those who operate unincorporated
businesses and those who operate incorporated businesses. They argue
that incorporation is important for risk-taking entrepreneurs due to the
limited liability and separate legal identity it provides, and they
find that those who choose incorporation are more likely to engage in
tasks that require creativity, analytical flexibility and complex
interpersonal communications; all tasks that are closely identified with
the concept of entrepreneurship.
People who operate unincorporated businesses, on the other hand, are
more likely to engage in activities that require high levels of hand,
eye and foot coordination, such as landscaping or truck driving."
"On average incorporated business owners earn more, work
more hours, have more years of schooling and are more likely to be a
college graduate than both unincorporated business owners and salaried
workers based on two different data sets."
"people with high self-esteem, a strong sense of controlling one’s
future, high Armed Forces Qualifications Test scores (AFQT)—which is a
measure of intelligence and trainability—and a greater propensity for
engaging in illicit activity as a youth are more likely to be
incorporated self-employed.
Moreover, it’s the combination of intelligence and risk-taking that
turns a young person into a high-earning owner of an incorporated
business. As the authors state, “The mixture of high learning aptitude
and disruptive, “break-the-rules” behavior is tightly linked with
entrepreneurship.”
These findings fit nicely with some notable recent examples of entrepreneurship—Uber and Airbnb. Both companies are regularly sued for violating state and local ordinances, but this hasn’t stopped them from becoming popular providers of transportation and short-term housing.
If the founders of Uber and Airbnb always obtained approval before
operating the companies would be hindered by all sorts of special
interests, including taxi commissions, hotel industry groups and nosy neighbors.
Seeking everyone’s approval—including the government’s—before operating
likely would have meant never getting off the ground and the companies
know this. It’s interesting to see evidence that many other, less
well-known entrepreneurs share a similar willingness to violate the
rules if necessary in order to provide their goods and services to
customers."
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