Learning, life-cycle and entrepreneurial investment

Abstract

In this paper I present a calibrated model of life-cycle occupation and investment decisions where households choose between paid work and entrepreneurship and conditional on the latter how much of their savings to invest in their business. The returns to entrepreneurial activity are modeled through Bayesian learning. The model is able to reproduce the main stylized facts of entry in and exit out of self-employment over the life-cycle. It also suggests a partial explanation of the recent finding of Moskowitz and Vissing-Jørgensen (2002) that entrepreneurs seem not to require a premium for the extra risk of their private equity investment.