Entrepreneurship as a Utility-Maximizing Response

Douglas, Evan J. & Shepherd, Dean A. (2000) Entrepreneurship as a Utility-Maximizing Response. Journal of Business Venturing, 15(3), pp. 231-251.

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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.

Impact and interest:

156 citations in Scopus
92 citations in Web of Science®
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ID Code: 5524
Item Type: Journal Article
Refereed: Yes
Additional Information: For more information, please refer to the journal's website (see link) or contact the author. Author contact details: evan.douglas@qut.edu.au
Keywords: Douglas, E, Entrepreneurship Utility, Economics
DOI: 10.1016/S0883-9026(98)00008-1
ISSN: 0883-9026
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > BUSINESS AND MANAGEMENT (150300)
Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > BUSINESS AND MANAGEMENT (150300) > Small Business Management (150314)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 2000 Elsevier
Deposited On: 18 Dec 2006 00:00
Last Modified: 10 Aug 2011 17:25

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