The Macroeconomic Implications of Uncertainty and Learning for Entrepreneurship

Han Gao and Lichen Zhang

Abstract: Entrepreneurs face non-trivial uncertainty upon entry and they gradually learn about their innate ability to reduce uncertainty over the life cycle. In this paper, we first establish empirical facts on entrepreneurial productivity uncertainty and learning using novel subjective belief data, which is consistent with life-cycle income profiles and outcomes of self-employed from the U.S. administrative data. We then introduce uncertainty faced by entrepreneurs and an endogenous learning process that are well-disciplined by the data into a heterogeneous agent life cycle model with occupational choice and financial frictions. Finally, we use the model to quantitatively exploit two important macroeconomic implications: (1) the sources of secularly declining entrepreneurship in the U.S. in the recent three decades; and (2) how large-scale policies aimed at reviving entrepreneurship should be designed, e.g. progressive personal income tax v.s flat tax. We show that our model with life-cycle learning dynamics changes the view to think about those macro aspects regarding entrepreneurship compared to the existing literature.

Keywords: Entrepreneurship, Learning, Beliefs, Personal Income Taxation, Heterogeneous Agents Life Cycle Model