MACRO: The Macroeconomic Implications of Uncertainty and Learning for Entrepreneurship; Dr Lichen Zhang (University of Hong Kong)

Abstract

Using subjective belief panel data, we find nascent entrepreneurs face significant uncertainty upon entry and they use most recent sales to revise their future performance forecasts. We then incorporate occupational choice under imperfect information and an endogenous learning process about innate entrepreneurial ability, which is well-disciplined by the data, into a general equilibrium heterogeneous agent life cycle model with financial frictions, bequests, and non-pecuniary motives. The model is consistent with key life cycle outcomes of self-employed business owners from U.S. administrative and survey data. We use the model to quantify the importance of information frictions and learning for selection into entrepreneurship at various stages of individuals’ life cycles, demonstrating that the value of learning decreases with age, and removing information frictions benefits those with the highest entrepreneurial productivity the most. Consequently, policies aimed at reviving entrepreneurship should prioritize the young by providing them with insurance for experimentation with entrepreneurship. We show that the current U.S. progressive personal income tax system is superior to a counterfactual flat tax reform in terms of promoting entrepreneurship, as progressive taxation favors the young by imposing a lower tax burden and providing higher insurance value. This resolves un- certainty and improves occupational sorting earlier, ultimately benefiting incumbent successful entrepreneurs who emerge from the young talents.

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