Attitudes toward risk and self-employment of young workers

A high degree of risk tolerance is often regarded as one of the fundamental characteristics of entrepreneurs. Using multiple responses on risky income gambles in the 1979 National Longitudinal Survey of Youth (NLSY79), I investigate the effect of individual risk tolerance on the probability of entry into self-employment. I construct a measure of individual level of risk tolerance that is corrected for reporting error and that varies with age and other covariates that potentially affect self-employment decision. I find that risk tolerance is an important determinant of the decision to enter self-employment. However, I find that the estimated effect of risk tolerance on the probability of entering self-employment is dramatically understated if measurement error is not taken into account. In addition, I find that that accounting for the correlation between risk tolerance and other covariates is important to correctly assess the effects of the other determinants of self-employment while it has a trivial effect on the estimated marginal effect of risk tolerance.