Journal Article

Can optimism solve the entrepreneurial earnings puzzle?

By Michele Dell’Era, Luca David Opromolla and Luís Santos-Pinto

Publication details

Publication date
Published in
Scandinavian Journal of Economics
Volume
125
Pages
pp. 139–169
Publisher
Blackwell
DOI
https://doi.org/10.1111/sjoe.12490
ISSN
3470520

Summary

In this paper, we apply a general equilibrium occupational choice model to the study of the impact of optimism on the earnings of entrepreneurs and workers. We extend the work of Lucas (1978) by assuming a fraction of individuals are optimistic about their ability as entrepreneurs. The model shows that optimism leads to a misallocation of talent and inputs, which raises input prices and lowers output. The model is calibrated to match salient features of the UK economy and the British Household Panel Survey. The calibration shows that optimism can account for more than half of the size of the entrepreneurial earnings puzzle in the UK.

Notes

Open Access

© 2023 The Authors. The Scandinavian Journal of Economics published by John Wiley & Sons Ltd on behalf of Föreningen för utgivande av the SJE.

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

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