Entrepreneurship as a Utility-Maximizing Response

Abstract

Research on entrepreneurship has investigated what entrepreneurs do, what
happens when they act as entrepreneurs, and why they act as entrepreneurs.
This paper contributes to the latter investigation, and specifically asks why
some people choose to be entrepreneurs, while others choose to be employees.
Responding to prior literature recognizing the lack of a coherent theory
of entrepreneurship and calling for a rigorous examination of the decision
to become an entrepreneur, this paper presents an economic model of the career decision. We postulate that the individual chooses an entrepreneurial career path, or a career as an employee, or some combination of the two, according to which career path promises maximal utility (or psychic satisfaction).

We assume that the individual’s utility from any particular occupation, whether self-employed or employed, depends on income (which depends in turn on ability), as well as working conditions such as decision-making control, risk exposure, work effort required, and other working conditions (net perquisites)associated with that occupation. Individuals will exhibit either preference or aversion towards each of the specified working conditions, and it is the degree of that preference or aversion, in conjunction
with the quantum of each working condition, which determines the total utility that the individual will derive from each particular occupation.
We show that all employees will have an incentive to be self-employed (if they could assemble the same resources as greater will be their incentive to be self-employed, other things being equal. Next, we show that a more positive attitude to work (i.e., a lesser aversion to work effort required) provides a greater incentive to be self-employed.

The individual’s degree of risk aversion also influences the choice to be an entrepreneur. The more tolerant one is of risk bearing, the greater the incentive to be self-employed. Similarly, the greater the preference for independence, or decision-making control, the greater the incentive to be self-employed. Finally, it is noted that perquisites (and avoidance of irksome elements) can potentially be controlled to
a greater degree when self-employed, so the individual will consider the differences in these other working conditions when contemplating a career choice.