April 2002

IZA DP No. 468: The Impact of Risk Aversion, Role Models, and the Regional Milieu on the Transition from Unemployment to Self-Employment: Empirical Evidence for Germany

published in: Jahrbücher für Nationalökonomie und Statistik, 2003, 223 (2), 204-221; see IZA Reprints 166/03

The focus of this paper is on the choice of the unemployed between becoming an entrepreneur or not. It contributes to the literature by empirically investigating two hitherto neglected issues: What is the impact of risk aversion and personal contact with a role model in shaping the decision to become an entrepreneur (controlling for standard demographic variables, i.e. sex, age, and education)? And given the personal characteristics and attitudes, how does the regional 'entrepreneurial milieu' affect the decision to start a new business out of unemployment? The econometric study is based on data from a recent representative survey of the population in ten German planning regions. We use a version of the probit model that takes care of the regional stratification of the data, and the results of the nonlinear models are carefully interpreted and illustrated. We show that a high degree of risk aversion, and lack of personal contact with a young entrepreneur, both reduce the probability of starting one's own business. A favourable 'regional entrepreneurial milieu' (proxied by higher levels of current start-up activity and larger shares of unemployed among the starters in a region) has a positive effect on the individual propensity to step into self-employment. All these impacts are not only statistically significant, but economically important, too.