Dezember 1999

IZA DP No. 79: Entrepreneurship from Scratch: Lessons on the Entry Decision into Self-Employment from Transition Economies

John S. Earle, Zuzana Sakova

This paper exploits the rapid rise in self-employment rates in post-communist Eastern Europe as a valuable "quasi-experiment" for understanding the sources of entrepreneurship. A relative demand-supply model and an individual sectoral choice model are used to analyze a 1993 survey of 27,000 adults in six transition economies. Estimated self-employment earnings premia are positive, and the data imply positive selection into both employee and self-employment status. Structural probit estimates show the probability of self-employment entry is unassociated with former Communist Party affiliation but positively related to schooling, pre-transition family income, receipt of property in restitution, pre-communist family business-holding, and predicted earnings differential. Cross-country variation in predicted self-employment entry rates and relative earnings provide evidence on the demand and supply factors affecting the decision to become an entrepreneur.