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  5. Entrepreneurs: Wealth and Policy Implications
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Entrepreneurs: Wealth and Policy Implications

Paper Session

Saturday, Jan. 4, 2025 8:00 AM - 10:00 AM (PST)

Hilton San Francisco Union Square, Union Square 10
Hosted By: Econometric Society
  • Chair: Sergio Salgado, University of Pennsylvania

The Role of Human Capital Specificity in Entrepreneurship

Attila Gyetvai
,
Bank of Portugal
Eugene Tan
,
University of Toronto

Abstract

Outside options determine whether a firm owner continues in business or exits; likewise, it determines whether a business opportunity is worth pursuing. Using data on Portuguese work histories and firm profitability, we document two sets of empirical regularities that suggest that outside options deteriorate with entrepreneurship. First, we find that the productivity of exiting firms are declining in tenure, which is inconsistent with the notion of constant outside options in standard models (e.g., Hopenhayn, 1992). Second, we find that entrepreneurs suffer large and persistent wage losses upon returning to paid work: relative to individuals who never entered entrepreneurship, returning entrepreneurs face a 12 percent immediate wage loss which decays over time with a recovery over 14 years. The losses are more pronounced for individuals with longer tenure in entrepreneurship and those with higher education. We argue that wage losses arise because human capital accumulated in entrepreneurship is only partially transferable to paid work. We formulate a quantitative macroeconomic model of entrepreneurship to quantify the size of the decline in outside options and its influence on the value of entrepreneurship.

Grow Your Business: The Macroeconomic Implications of the Intensive Margin of Entrepreneurship

Yanran Guo
,
York University

Abstract

This paper shows that high top marginal income tax rates generate large aggregate output and productivity losses. These losses arise because taxes distort the investment decisions of entrepreneurs, who constitute a large share of high-income earners. I identify two novel distortions. The first is the ``productivity investment effect". Top income tax rates distort the productivity investment decisions not only of entrepreneurs who are already in the top income bracket but also of those who will become top earners in the future by building up their firms. The second force is the ``incorporation timing effect"". Successful entrepreneurs grow their firms and then sell their businesses to the corporate sector through incorporation. High top tax rates push these entrepreneurs to sell before their firms reach their full productivity potential. This force is driven by a feature of the tax code -- the sale of a firm is treated as capital gains

Taxing the Rich? A Theory of Wealth and Income Inequality

V.V. Chari
,
University of Minnesota
Patrick J. Kehoe
,
Stanford University
Pierlauro Lopez
,
Federal Reserve Bank of Cleveland
Elena Pastorino
,
Stanford University
Sergio Salgado
,
University of Pennsylvania

Abstract

Recently it has been argued that a progressive wealth tax may have large beneficial effects on the distribution of welfare in society and effectively no adverse effects on real economic activity. This paper quantitatively evaluates the merits of this view within a dynamic general equilibrium model in which wealth taxes distort the effort that managers expend and tilt their choice of projects towards less risky but also less innovative ventures. Our preliminary simulations show that even a simple version of the model accounts well for the increase in wealth inequality in the United States over the past 30 years. Such a model implies a substantial aggregate output loss from wealth taxes of the magnitude currently debated.
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy