Research Highlights

What Makes an Entrepreneur?

By Deepak Hegde and Justin Tumlinson

Deepak Hegde

Policies that stimulate entrepreneurship will only generate aggregate wealth if those that start firms are truly more productive as entrepreneurs.

If entrepreneurs are made, not born, new research from NYU Stern Professor Deepak Hegde shows that one factor that propels them to seek their fortunes is how they’re judged, or misjudged, by potential employers, starting with experiences in their teenage years.

In “Asymmetric Information and Entrepreneurship,” Professor Hegde and co-author Justin Tumlinson developed a model in which individuals signal their unobservable ability to employers (e.g., through educational qualifications and work history). “Signals are imperfect,” they write, “and individuals with greater ability than their signals convey to employers become entrepreneurs.”

The authors analyzed data from decades-long longitudinal studies of thousands of individuals from the US and the UK who were interviewed annually beginning in their teenage years. These data showed that individuals who chose entrepreneurship had higher ability (measured through standardized tests of cognitive ability) than those who became company employees, at every level of educational attainment. Entrepreneurs, whose inferior credentials evidently failed to impress potential employers, also ultimately made more money than similarly credentialed employees.

The insight that asymmetric information about ability and signals drives entrepreneurship can explain the career arcs of individuals across the spectrum, the authors write, from the taxi driver or corner food vendor lacking a US degree to the founder of a revolutionary, high-tech startup like college dropout Steve Jobs, whose bid for a job at Hewlett-Packard was rejected. “Any individual will start his own venture if he cannot adequately signal his productive talents to potential employers and will earn more than he would in traditional employment,” concludes Professor Hegde.