what makes a successful entrepreneur? the effect of elite...

What Makes a Successful Entrepreneur? The Effect ofElite College and Intergenerational Transfer

Naijia Guo 1 Charles Ka Yui Leung 2

1Chinese University of Hong Kong

2City University of Hong Kong

National Graduate Institute for Policy StudiesMay 16, 2018

Guo and Leung (CUHK and CityU) Entrepreneurship GRIPS, May 2017 1 / 68

Section 1

Intro


Motivation

This paper attempts to shed light on two important debates in economics

Debate on the “elite college premium” (ECP)I Students who attended more selective colleges earned about the same

after controlling for selection (Dale and Krueger 2002, 2014)I Black and Smith (2006) show that the estimates of the effects of

school quality are attenuated when a single measure is used

Debate on the “entrepreneurship premium” (EP)I Many individuals enter entrepreneurship and persist in running business

despite it has low median returns but very high risk (Hamilton 2000,Moskowitz and Vissing-Jorgensen 2002, Hall and Woodward 2010,Kartashova 2014)

Two debates help to understand social mobility and economicinequality.

We link the two debates by studying the effect of elite college onentrepreneur decision and performance.


Summary Statistics by Career

All Employee Entrepreneur Unincorporated Incorporated

Age 35.90 35.41 38.10 37.44 39.59Years of schooling 14.34 14.28 14.57 14.32 15.12College degree 39.67% 38.66% 44.24% 38.44% 57.23%

Income(median) 51,645 51,343 54,010 48,093 72,996Income(mean) 63,288 60,314 76,689 58,542 117,360Income(std) 67,632 56,618 102,585 64,426 149,760

Observations 22,563 18,465 4,098 2,833 1,265Proportion 100% 81.8% 18.2% 12.6% 5.6%

Data source: Panel Study of Income Dynamics. Sample is restricted to white male aged 25-60.

Entrepreneurs are defined as those who own a business.


Motivation

There exists significant differences in social economic status betweenworkers and entrepreneurs

These differences are mainly driven by incorporated business owners,while unincorporated business owners are very similar to workers(Levin and Rubinstein, 2017)

Self-employment has been shown to be not a good proxy forentrepreneurship; Many self-employed people are small businessowners; they are not growth-creating investors (Glaeser, 2007, Evansand Leighton, 1989)

Important to distinguish these two types of entrepreneurs; we define“successful” entrepreneurs as those who own an incorporated business

Research question: what makes people a successful entrepreneur?


Intergenerational Tranfer

Correlation between father’s and son’s careerEmployee Unincorporated Incorporated

Employee 49.5% 42.1% 40.9%Unincorporated 28.4% 33.2% 24.9%Incorporated 22.1% 24.7% 34.2%

Correlation between father’s and son’s educationHigh school Non-elite college Elite college

High school 80.1% 47.9% 29.6%Non-elite college 16.3% 39.8% 38.8%Elite college 3.6% 12.3% 31.6%

Father’s status is in column and son’s status is in row. Data source:Panel Study of Income Dynamics

Following Black and Smith (2006), we construct a university rankingbased on factor analysis of five variables: faculty student ratio, rejectionrate, retention rate, faculty salary and mean of reading and math SATscore. The top 100 private universities are defined as elite college.


Effect of Education on Career Choice

Education High school Non-elite college Elite college

Probability of owning unincorporated business25-34 10.8% 9.1% 6.5%35-44 15.5% 15.6% 18.3%45-54 14.4% 13.4% 19.1%average (25-54) 12.7% 11.9% 12.9%Probability of owning incorporated business25-34 3.1% 4.4% 4.5%35-44 4.4% 9.7% 13.1%45-54 6.0% 11.9% 17.5%average (25-54) 3.9% 7.4% 9.9%

Data source: Panel Study of Income Dynamics


Effect of Education on Income

Education High school Non-elite college Elite college

Income of unincorporated business owners25-34 45,051 62,667 55,81035-44 47,894 79,527 104,56645-54 46,751 90,441 116,664average (25-54) 46,398 74,804 96,212Income of incorporated business owners25-34 67,035 94,467 107,22935-44 93,037 163,092 232,41445-54 110,003 111,520 173,325average (25-54) 85,020 129,013 186,506

Data source: Panel Study of Income Dynamics


Motivation

Intergenerational relationship in career choice and educationI If the father owns an incorporated business, the son has a higher

chance of also owning an incorporated business; same forunincorporated business.

I If the father goes to elite college, the son is more likely to go to elitecollege; same for non-elite college.

Impact of education attainment on career choiceI Graduating from an elite college is associated with higher probability of

owning an incorporated business and better performance ofincorporated business.

I Elite-college graduates have a higher human capital endowment or alarger monetary transfer from their family – require a model to identifythe effect of elite-college education


Research Question

Study two factors that are important in the decision to embark upon,and success in entrepreneurship (own an incorporated business):

I family background: if parents are successful entrepreneurs, theirchildren are likely to get higher family transfer in terms of both abilityand money

I education: college education, in particular elite-college education, alsoplays an important role in affecting the career choice by improvinghuman capital and providing networks.


Literature Review

Wage effect of college qualityI Elite-college premium: Behrman et al. (1996), Brewer et al. (1999),

Hoxby (2001), Black and Smith (2006)I Not enough wage premium: Dale and Krueger (2002, 2014)

Determinants of entrepreneurshipI Parental entrepreneurship: Dunn and Holtz-Eakin (2000), Nicolaou and

Shane (2010), Lindquist et al. (2015), Hvide and Oyer (2018)I Borrowing constraint: Cagetti and De Nardi (2006), Cagetti and De

Nardi (2009), Bassetto et al. (2015), Corradin and Popov (2015),Bracke et al (2018)

I Schooling: Van der Sluis et al. (2008), Parker and Van Praag (2006),Samaniego and Sun (2016)

I Entrepreneur premium puzzle: Vereshchagina and Hopenhayn (2009),Astebro et al. (2014), Dillon and Stanton (2017)

Intergenerational linkageI Causal mechanisms on the correlation between parental background

and children outcomes such as education and income: Black andDevereux (2010)


Contribution

Our project develops a life-cycle model that incorporates family factor(intergenerational transfer in ability and money), education impact,and borrowing constraints in entrepreneurial decisions

We distinguish two types of entrepreneurs: unincorporated vs.incorporated

We propose that attending an elite college may be an importantfactor that leads to successful entrepreneurship

Understand the two puzzlesI Elite-college premium puzzle: introduce the effect of elite college on

entrepreneurshipI Entrepreneur puzzle: introduce the difference between unincorporated

business and incorporated business


Methodology

An overlapping generations modelI Individuals self-select into different education paths: high school,

non-elite college, elite collegeI Individuals also make career decisions: employee, unincorporated

business, incorporated businessI Borrowing constraint applies when going to college and running

businessI Two types of intergenerational transfer: ability transfer and monetary

transfer

Data: Panel Study of Income DynamicsI A longitudinal survey that captures intergenerational mobility on

education attainment, career choice, and earnings

Counterfactual analysisI Shut down elite college and IGTI Relax borrowing constraints for college students and entrepreneursI Subsidies to incorporated and elite college students


Preview of Results

Elite college increases entrepreneur’s human capital and leads to moresuccessful entrepreneurs and higher entrepreneurial income.

Intergenerational transfer slightly reduces the numbers of elite collegestudents and successful entrepreneurs.

Relaxing the borrowing constraint for entrepreneurs has a substantialeffect on the number of incorporated business owners and theirincome, while removing the borrowing constraint for elite collegestudents has a smaller effect.

Providing subsidy (universal or need-base) to elite college studentscan also increase the number of incorporated business owners.


Section 2

Model


Environment: Overlapping Generations Model

A model period is 5 years, each individual lives for at least 65 yearsand at most 100 years

For the first 20 years, an individual is part of the parent’s householdand does not make any economic decisions

At age 20, a young individual moves out of his parent’s house andforms his own household. At the same time, he makes educationdecisions: high school, non-elite college, and elite college, which aredenoted by e ∈ hs, nc , ecAt age 30, he has a child.


Environment: Overlapping Generations Model

All working age households make career choices: employee, owning aunincorporated business, or owning an incorporated business, whichare denoted by d ∈ em, ub, ib;

I All agents decide how much to consume (c) and save (k).I An entrepreneur chooses the investment level (i).I Workers must retire at 65, but entrepreneurs can work after 65.

Individuals are partially altruistic towards their offspring: weight ofchild’s utility ω ∈ [0, 1]

I At the moment a child leaves home, the parent can give him aone-time gift of liquid assets (R), which helps the child pay foreducation costs or finance the business.


Human Capital

Each person is born with two types of ability (A = Aw ,Ar),employee ability (Aw ) and entrepreneur ability (Ar ).

Abilities follow a log normal distribution and is imperfectly inheritedfrom parent according to an AR(1) process

logAc = θ logAp + ψ, ψ ∼ N(0,Ω2)

where Ac is child’s ability and Ap is parent’s ability.


Human Capital

College helps to build up human capital

Employee human capital hw :

log hw = logAw + µwe + γ1x + γ2x2

Entrepreneur human capital, hr :

log hr = logAr + µre

where µwe and µre are the gain in employee and entrepreneur humancapital through college education. x is potential experience, γ’scapture return to potential experience.


Technology

Two sectors of production: one populated by entrepreneurs and oneby non-entrepreneurial firms

Non-entrepreneurial sector production function:

Fw (K , L) = PwKαL1−α

where K and L are the total capital and labor inputs in thenon-entrepreneurial sector.

Entrepreneurial sector production function:

Fr (I ) = AI ν

v ∈ [0, 1], diminishing returns from investment.


Technology

Employees’ earnings are defined as

Iw = whweεw

εw ∼ N(0, σ2w )

where εw is an idiosyncratic wage shock unobserved by individualsbefore they make career choice.

Unincorporated business

In = Pnhreεn iv

where i is investment and Pn is the technology of unincorporatedbusiness.εn ∈ N(0, σn), investment shock unobserved by individuals beforethey make career choice..


Technology

Incorporated-business:

Ii = Pihieεi iv − CI1X 6= ib

I Use both employee human capital and entrepreneur human capital

hi = erAwhr

Incorporated business owners engage in activities demanding a highdegree of nonroutine cognitive skills (LR2017).

I CI is a fixed cost of opening an incorporated business.There are direct costs of incorporation, such as annual fees and thepreparation of more elaborate financial statements, and indirect agencycosts associated with the separation of ownership and control(LR2017).

I When employee ability and savings are above a certain cutoff,incorporated business becomes more attractive than unincorporated.


Leverage

Entrepreneurs can borrow up to a proportion λ of their assets k(Kiyotaki and Moore, 1997):

(i − k) ≤ λk

Maximum a student is allowed to borrow to get into college is givenby

Te − Fe − k ≤ λk

where Te is college tuition and Fe is financial aid, which is a functionof education type, family asset and ability (both need base and meritbase)

Fe = fe(kp,Aw )

If an individual already carries loans at the beginning of this period(student loan or entrepreneur loan), he is not allowed to borrow againbefore paying back all his loans.


Preference

The individual utility function is given by

u(c , d) =c1−σ − 1

1− σ+ bub1d = ub+ bib1d = ib

+ bnc1d = nc+ bec1d = ec

bd ∼ N(0, σ2d), d ∈ ub, ib, nc , ec are shocks on the consumptionvalue of entrepreneurship and college, respectively.

A household’s lifetime utility, U, is given by

U =T∑t=1

βt−1ζ(t)u(t) + β6ωUc

Discount rate is β and survival rate is ζ(t). Child’s utility is Uc withweight ω.


Retirement Stage: Employee

Retired employee (after age 65)

Wem(Ω) = maxc,k ′

u(c , em) + βζ(t)EV (Ω′)

s.t. c + k ′ = k(1 + r) + p(e)

c > 0, k ′ ≥ 0

where p(e) is the pension received by retired employees, which is assumedto be φ fraction of the average employee earnings before retirement

Ω = t, e,Aw ,Ar , k ,X , bub, bib,Ω′ = t + 1, e,Aw ,Ar , k′, em, b′ub, b

′ib

The expectation of V () is with respect to b′ub and b′ib.


Working Stage: Employee, No Transfer

Working Employee

Wem(Ω, εw ) = maxc,k ′

u(c , em) + βEV (Ω′)

s.t. c + k ′ = k(1 + r) + Pwhweεw , c > 0

where Ω′ = t + 1, e,Aw ,Ar , k′, em, b′ub, b

′ib


Working and Retirement Stage: Unincorporated, NoTransfer

Unincorporated business owner

Wub(Ω, εn) = maxc,k ′,i

u(c, ub) + βζ(t)EV (Ω′)

s.t. c + k ′ = (1− δ)i + Pnhreεn iv − (1 + r)(i − k)

c > 0, (i − k) ≤ λk

where Ω′ = t + 1, e,Aw ,Ar , k′, ub, b′ub, b

′ib.


Working and Retirement Stage: Incorporated, No Transfer

Incorporated business owner

Wib(Ω, εn) = maxc,k ′,i

u(c , ib) + βζ(t)EV (Ω′)

s.t. c + k ′ = (1− δ)i + Pihieεi iv − CI1X 6= ib − (1 + r)(i − k)

c > 0, (i − k) ≤ λk

where Ω′ = t + 1, e,Aw ,Ar , k′, ib, bub, bib.


Working and Retirement Stage: Career Choice

Agents are allowed to freely change their career paths at the beginning ofeach period, but they do not observe productivity shocks ε’s.

V (Ω) = maxEWem(Ω, εw ),EWub(Ω, εn),EWib(Ω, εi )

The expectations are over ε’s.Once agents reach retirement age, they are only allowed to choose theircareer paths if they were entrepreneurs in the last period, otherwise, theyhave to retire

V (Ω) =

maxWem(Ω),EWub(Ω, εn),EWib(Ω, εi ) if X = ub, ib

Wem(Ω) if X = em


Working Stage: Employee, with Transfer

At age 50, parents are allowed to give a one-time transfer R to theiroffsprings

Value function of “employee-parent” at age 50 becomes

Wem(Ω, εw ) = maxc,k ′,R

u(c , em) + βEV (Ω′) + ωEJ(Φ|Aw ,Ar )

s.t. c + k ′ + R = k(1 + r) + Pwhweεw , c > 0

where J (.) is the value function of the child.Φ = Aw , Ar ,R, k

′, ηc , ηe. The expectation is over child’s ability Aw

and Ar , and shocks on consumption value of college ηc and ηe .Child’s abilities are correlated with parent’s abilities, but not observedby parents by the time of transfer.


Working Stage: Entrepreneur, with Transfer

“Unincorporated-entrepreneur-parent” at age 50

Wub(Ω, εn) = maxc,R

u(c , ub) + βV (Ω′) + ωEJ(Φ|Aw ,Ar )

s.t. c + k ′ + R = (1− δ)i + Pnhreεn iv − (1 + r)(i − k)

c > 0, (i − k) ≤ λk

“Incorporated-entrepreneur-parent” at age 50

Wib(Ω, εi ) = maxc,R

u(c , ib) + βV (Ω′) + ωEJ(Φ|Aw ,Ar )

s.t. c + k ′ + R = (1− δ)i + Pihieεi iv − CI1X 6= ib − (1 + r)(i − k)

c > 0, (i − k) ≤ λk


Schooling Stage

At age 20, a young agent makes schooling decisions.

Value function of the offspring is given by

J(Φ) = maxHhs(Φ),Hnc(Φ),Hec(Φ)

Value of high school

Hhs(Φ) = EV (0, hs,Aw ,Ar , k , em, bub, bib)

where expectation is over bub and bib.

Value function of attending college is

He(Φ) = maxc

u(c, e) + βEV (Ω′)

s.t. c + k ′ = (1 + r)(R − Te + fe(kp,Aw )), c > 0

Te − fe(kp,Aw )− R ≤ λR for e = nc , ec

where Ω′ = 1, e,Aw ,Ar , k′, em, b′ub, b

′ib.


Equilibrium

Market clearing conditions

Labor market clears: total labor supply (in efficient labor units) fromworkers equals the labor demand from the nonentrepreneurial sector.

L =

∫j∈Sw

hweεwdj

Capital market clears: total capital from all agent’s savings equalscapital demand from both entrepreneurial and nonentrepreneurialsector. ∫

j∈Sw

kdj =

∫j∈Se

bdj + K

where j is the index of household, Sw and Se are the sets ofhouseholds who choose to be workers/entrepreneurs. b = i − kdenotes the amount of borrowing from entrepreneurs.


Section 3

Data


Data

Panel Study of Income Dynamics (PSID)I A longitudinal project began in 1968 with a nationally representative

sample of over 18,000 individuals living in 5,000 families in the UnitedStates

I Keep track of these individuals and their descendants, even after theyform new families

I Restricted access data on school identifiersF Can be linked to the Integrated Post-secondary Education Data System

(IPEDS), which provides rich information on the quality of college thatthe respondent attended

National Longitudinal Survey of Youth 1997 (NLSY97)I A longitudinal project began in 1997 that follows around 9,000

American youth born between 1980-84I Initial distribution of child’s ability (ASVAB score), own wealth, and

family wealth


Data

Elite college definition

Use factor analysis to construct a college quality index (Black andSmith, 2006)

Index = 0.096 ∗ faculty-student ratio + 0.137 ∗ rejection rate + 0.257 ∗retention rate + 0.245 ∗ faculty salary (in millions) + 0.385 ∗mean of reading and math SAT (in 100s)

Private colleges and universities ranked in the top 100 are defined aselite college

sharefaculty-student

ratio

rejectionrate

retentionrate

facultysalary

SATscore

in-statetuition

out-of-state

tuition

elite college 16.5% 0.13 0.66 0.94 92,859 1,356 29,068 30,893non-elite college 83.5% 0.07 0.32 0.74 59,928 1,035 14,115 17,104

College Characteristics of Elite and Non-elite Colleges


Section 4

Identification and Estimation


Fixed Parameters

Parameter Meaning Calibration

β discount rate 0.821ζt survival rate after age 65 Health and Retirement Studyσ utility function parameter 1.5 (CDN2006)φ Pension 40% of average earnings (CDN2006)λ budget constraint 1.22 (RR2014)Te college tuition (Fu2014)

fe(kp,Aw ) college financial aid (Fu2014)

CDN2006: Cagetti and De Nardi (2006)RR2014: Robb and Robinson (2014)Fu2014: Fu (2014)

Fixed Parameters


Calibration of Leverage Ratio

Robb and Robinson (2014): Kauffman Firm Survey, 5000 firms

(owner equity + insider equity + outsider equity)/(total capital)≈ 45% ⇒ λ = 1.22


Calibration of College Tuition and Financial Aid

Tuition:I Elite college: 33,046I Non-elite college: 12,761

Financial aid:I Non-elite college: 13901− 32.5 ∗ family wealth/1000− 7432 ∗

employee ability below first tertile + 6875 ∗employee ability above second tertile

I Elite college: 20224− 32.5 ∗ family wealth/1000− 22267 ∗employee ability below first tertile + 12950 ∗employee ability above second tertile


Identification

How to identify the effect of elite college on human capital?

Using panel data, we can identify worker human capital for elitecollege graduates (hwec) and that for non-elite college graduates (hwnc)

Then we can identify the human capital gains through elite andnon-elite college using the following equations

E (Aw |Aw > A∗w ) + µwec = E (hwec)

E (Aw |Aw ≤ A∗w ) + µwnc = E (hwnc)

1− F (A∗w ) = Pr(e = ec)

Hec(A∗w ) = Hnc(A∗w )

Four equations and four unknowns: µwec , µwnc , σe ,A

∗w .


Estimation

Simulated Methods of MomentsI Education choiceI Career choice by education and ageI Average income by education, career, and ageI Variance of income by careerI Correlation between income in period t and t + 1 by careerI Transitions between career typesI Intergenerational mobility in education and career


Section 5

Estimation Results


Parameter Estimates

Employee Entrepreneur

Technology 1645 5.45/5.85 (UB/IB)Return to non-elite college 0.47 0.35Return to elite college 0.47 0.37Return to potential experience 0.32 -Return to experience square -0.032 -Std of productivity shock 0.45 0.32/0.53 (UB/IB)Fixed cost - -/80000 (UB/IB)Std of ability 0.65 0.45Intergenerational ability transfer 0.8 0.3Std of consumption shock - 0.0012/0.0007 (UB/IB)

Correlation between EM and EN ability 0Contribution of EM ability to IB human capital 0.2Std of consumption shock on college 0.0027/0.0014 (NC/EC)Weight on offspring’s welfare 0.057Output elasticity of capital 0.27

Parameter estimates


Elite-college Premium Puzzle

There is no ability requirement imposed by elite college, but highability students self-select into elite college.

EM ability EM UB IB Total

HS 0.004 -0.348 0.064 -0.039NC 0.096 -0.120 0.199 0.076EC 0.302 0.041 0.353 0.270

EN ability EM UB IB Total

HS -0.124 0.505 0.675 -0.003NC -0.111 0.325 0.459 -0.024EC -0.035 0.324 0.454 0.065

Average ability by education and career


Elite-college Premium Puzzle

Although elite college does not improve employee ability more thannon-elite college does, but it has a bigger impact on entrepreneurability (0.35 vs. 0.37)

However, since elite college charges higher tuition (33,046 vs.12,761), only those receive high consumption shocks on elite collegechoose to enroll

Elite college premium (= DPV of elite college student income - DPVof non-elite college student income) is -24,021.


Entrepreneur Premium Puzzle

Our model incorporates several mechanisms that may explainentrepreneur premium puzzle

I Open a business is risky – people do not observe investment shocksbefore they make their career choice decisions

I Dynamic life-cycle decisions – with options of entry and exitentrepreneurship

I Option of staying in business after retirement ageI Allow for two types of businesses: the incorporated earn more than

salaried workers, the unincorporated earn less, and there are moreunincorporated than incorporated individuals


Entrepreneur Premium

Entrepreneur premium – income equivalence

Career Premium

Entrepreneur 27,305Unincorporated 19,229Incorporated 42,946

Entrepreneur premium = DPV of entrepreneur income - DPV ofworker income

Consistent with Daly (2015), but control for selection in unobservables


Incorporated VS. Unincorporated

IB has higher productivity than UB, but also more risky.

Cost of opening an incorporated business is 80,000.

Those with high employee ability and entrepreneur ability sort into IB;those with high entrepreneur ability and low employee ability sort intoUB.

Model’s predictions:I IB entrepreneurs tend to be successful salaried workers before becoming

IB. UB entrepreneurs tend to earn less as salaried workers thancomparable salaried workers that never become self-employed.

I UB rarerly incorporate and IB rarely become unincorporated.


Model Fit0

.2.4

.6

high school non-elite college elite college

Education Choice

data model

0.2

.4.6

.81

HS data HS model NC data NC model EC data EC model

Career Choice by Education

employee unincorporatedincorporated


Model Fit

05%

10%

15%

20%

25 30 35 40 45 50 55age

unincorporated data unincorporated modelincorporated data incorporated model

Career Choice by Age


Model Fit

050

000

1000

0015

0000

2000

00

high school non-elite college elite college

Income by Education and Career

employee data employee modelunincorporated data unincorporated modelincorporated data incorporated model


Model Fit

050

000

1000

0015

0000

25 30 35 40 45 50 55age

employee data employee modelunincorporated data unincorporated modelincorporated data incorporated model

Income by Career and Age


Model Fit

Career Transition from Year t to t + 5

Data EM UB IB

EM 87.0% 38.7% 34.3%UB 9.8% 52.0% 12.7%IB 3.3% 9.3% 53.0%

Model EM UB IB

EM 90.2% 31.5% 21.8%UB 7.5% 49.1% 36.3%IB 2.3% 19.4% 41.9%

Period t in columns and period t + 5 in rows.EM: employee; UB: unincorporated business owner; IB:incorporated business owner.


Model Fit

Intergenerational Mobility

Education choiceData HS NC EC Model HS NC EC

HS 80.1% 47.9% 29.6% HS 81.3% 60.1% 50.9%NC 16.3% 39.8% 38.8% NC 14.6% 31.5% 35.2%EC 3.6% 12.3% 31.6% EC 4.1% 8.4% 13.9%

Career choiceData EM UB IB Model EM UB IB

EM 49.5% 42.1% 41.0% EM 45.7% 31.6% 25.8%UB 28.4% 33.2% 24.9% UB 30.4% 35.1% 28.9%IB 22.1% 24.7% 34.2% IB 23.9% 33.3% 45.4%

Fathers in columns and sons in rows.HS: high school; NC: non-elite college; EC: elite college. EM:employee; UB: unincorporated business owner; IB: incorporatedbusiness owner.


Section 6

Counterfactual Experiment



Effect of elite college and intergenerational transfer

Shut down the option of going to elite college

Shut down intergenerational transfer (IGT) in money and ability


Effect of Elite College and IGT

Effect on education and career choices

Baseline No elite college No IGT

Education choice% of college 35.36% 30.72% 36.26%

change -4.64% 0.90%% of elite college 5.62% 0.00% 6.02%

change -5.62% 0.40%Career choice% of entrepreneur 18.32% 17.99% 18.43%

change -0.33% 0.11%% of incorporated 5.47% 5.30% 5.51%

change -0.17% 0.04%GiniIncome Gini 0.5584 0.5555 0.5576

change -0.0029 -0.0008


Effect of Elite College and IGT

Effect on entrepreneurial performance

Baseline No elite college No IGT

Income by careerUnincorporated 59,389 56,588 59,964

change -2,801 -575Incorporated 118,269 112,309 118,668

change -5,960 -399% of incorporated by age25-34 1.74% 1.82% 1.76%

change 0.08% 0.02%35-44 4.61% 4.40% 4.59%

change -0.21% -0.02%45-54 7.55% 7.21% 7.57%

change -0.34% 0.02%% incorporated staying incorporated in the next period25-54 41.94% 41.77% 41.81%

change -0.17% -0.13%



Effect of borrowing constraints

Relex the borrowing constraint for entrepreneurs (λ = 1.5)

Remove the borrowing constraint for college entrance


Counterfactual – Borrowing Constraints

Effect on education and career

BaselineRelax borrowing

constraint forentrepreneurs

Remove borrowingconstraint for

college students

Education choice% of college 35.36% 36.64% 36.80%

change 1.28% 1.44%% of elite college 5.62% 6.08% 5.78%

change 0.46% 0.16%Career choice% of entrepreneur 18.32% 19.71% 18.44%

change 1.39% 0.12%% of incorporated 5.47% 6.02% 5.55%

change 1.63% 0.08%GiniIncome Gini 0.5584 0.5590 0.5565

change 0.0006 -0.0019


Counterfactual – Borrowing Constraints

Effect on entrepreneur performance

BaselineRelax borrowing

constraint forentrepreneurs

Remove borrowingconstraint for

college students

Income by careerUnincorporated 59,389 65,335 59,931

change 5,946 541Incorporated 118,269 127,980 119,196

change 9,710 926% of incorporated by age25-34 1.74% 1.97% 1.74%

change 0.23% 0.00%35-44 4.61% 5.13% 4.66%

change 0.52% 0.05%45-54 7.55% 8.23% 7.71%

change 0.68% 0.16%% of incorporated staying incorporated in the next period25-54 41.94% 42.07% 41.89%

change 0.13% -0.05%


Elite College Enrollment

Any high-ability-low-wealth (HALW) students who do not go to elitecollege?

Borrowing constraint for entering college

Consumption smoothing

Wealth accumulation and entrepreneurship incentive. The borrowingconstraint will prevent people from starting a business if their asset isnegative or too low



Policy experiments

Provide $10,000 subsidy to incorporated entrepreneurs

Provide universal $20,000 subsidy to elite college students

Provide need-base $20,000 subsidy to elite college students fromfamilies with wealth below median

Government budget balance: use labor income tax to finance the subsidy.


Counterfactual – Subsidies

Effect on education and career

BaselineSubsidy to

incorporatedSubsidy to

elite collegeSubsidy to poor

elite college

Education choice% of college 35.36% 35.52% 38.46% 36.62%

change 0.16% 3.10% 1.26%% of elite college 5.62% 5.66% 10.48% 8.00%

change 0.04% 4.86% 2.38%Career choice% of entrepreneur 18.32% 18.44% 18.48% 18.37%

change 0.12% 0.16% 0.05%% of incorporated 5.47% 5.55% 5.54% 5.50%

change 0.08% 0.07% 0.03%GiniIncome Gini 0.5584 0.5587 0.5578 0.5584

change 0.0003 -0.0006 0.0000


Counterfactual – Subsidies

Effect on entrepreneur performance

BaselineSubsidy to

incorporatedSubsidy to

elite collegeSubsidy to poor

elite college

Income by careerUnincorporated 59,389 59,992 60,112 59,019

change 603 723 -370Incorporated 118,269 112,772 116,987 117,414

change -5498 -1282 -856% of incorporated by age25-34 1.74% 2.00% 1.81% 1.83%

change 0.26% 0.07% 0.09%35-44 4.61% 5.12% 4.58% 4.53%

change 0.51% -0.03% -0.08%45-54 7.55% 8.19% 7.68% 7.58%

change 0.64% 0.13% 0.03%% of incorporated staying incorporated in the next period25-54 41.94% 43.63% 40.80% 41.54%

change 1.69% -1.14% -0.40%


Effect on Social Welfare by Ability and Wealth

01,

000

2,00

03,

000

0 1 2 3 4 5 6

Welfare Change by Worker Ability

subsidy to incorporated subsidy to elite-collegesubsidy to poor elite-college

01,

000

2,00

03,

000

0 1 2 3 4 5 6

Welfare Change by Entrepreneur Ability


02,

000

4,00

06,

000

0-10 20-40 50-90 100-190 200-290

Welfare Change by Own Wealth (in thousands)


01,

000

2,00

03,

000

0-10 20-40 50-90 100-190 200-290 300-390 400-490 500-600

Welfare Change by Family Wealth (in thousands)



Conclusion

Analyze the determinants of entrepreneurial selection andperformance

I Elite college educationI Parental ability and monetary transfer

Shed lights on two puzzlesI Elite college premiumI Entrepreneurship premium

CounterfactualsI EN borrowing constraint has a big impact on the EN decision and

performance, while CO borrowing constraint has a smaller impact.I Providing subsidy to IB increases the number of IB but reduces their

average income. Providing universal subsidy or need-base subsidy toEC can also increase IB.


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