entrepreneurship

Topics: Higher education, Econometrics, Education Pages: 46 (6085 words) Published: October 11, 2013
Entrepreneurship Research Journal
Manuscript 1051

Are Education and Entrepreneurial Income
Endogenous? A Bayesian Analysis
Joern H. Block, Technische Universitat Munchen
Lennart Hoogerheide, Free University Amsterdam
Roy Thurik, Erasmus University Rotterdam

DOI: 10.1515/2157-5665.1051
©2012 De Gruyter. All rights reserved.

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Download Date | 7/16/12 12:21 PM

Are Education and Entrepreneurial Income
Endogenous? A Bayesian Analysis
Joern H. Block, Lennart Hoogerheide, and Roy Thurik

Abstract
Education is a well-known driver of (entrepreneurial) income. The measurement of its influence, however, suffers from endogeneity suspicion. For instance, ability and occupational choice are mentioned as driving both the level of (entrepreneurial) income and of education. Using instru-mental variables can provide a way out. However, two questions remain: whether endogeneity is really present and whether it matters for the size of the estimated relationship. Using Bayesian methods, we find that the relationship between education and entrepreneurial income is indeed en-dogenous and that the impact of endogeneity on the estimated relationship between education and income is sizeable. Implications of our findings for research and practice are discussed.

KEYWORDS: education, income, entrepreneurship, self-employment, endogeneity, instrumental variables, Bayesian analysis
Author Notes: Comments by Herman K. van Dijk and an anonymous reviewer are gratefully acknowledged. This paper has been written in cooperation with the research program SCALES, carried out by Panteia/EIM and financed by the Dutch Ministry of Economic Affairs. It benefitted from a short stay of Roy Thurik at Université de Caen Basse-Normandie.

Brought to you by | Erasmus University Library (Erasmus University Library) Authenticated | 172.16.1.226
Download Date | 7/16/12 12:21 PM

Block et al.: Are Education and Entrepreneurial Income Endogenous?

1. Introduction
The advent of a knowledge-intensive economy, together with the recognition that such an economy requires a vital entrepreneurial sector (Audretsch and Thurik 2001, Audretsch 2007, Block, Thurik, and Zhou in press), has renewed attention to the effect of education on entrepreneurial choice (Bosma et al. 2004, Block, Hoogerheide, and Thurik in press). Moreover, human capital (including age, experience and formal education) is shown to be a major determinant of entrepreneurial performance when compared to other explanatory variables (Parker 2009: chapter 13; de Bruin and Ferrante, 2011).1 Finally, of the many factors known to influence entrepreneurial choice and performance (Van der Sluis et al. 2008, Grilo and Thurik 2008, Parker 2009), education is popular among politicians because it can be influenced by education policy (European Commission 2003, OECD, 2009).

The measurement of the influence of education on entrepreneurial choice and income, however, suffers from endogeneity suspicion because there may be a correlation between the education variable and the error term. Neglecting this endogeneity can lead to unreliable estimation results even in large samples because estimators of the model parameters are inconsistent.2 There are several possible causes for this endogeneity. First, omitted factors may exist that impact both education and entrepreneurial performance. For instance, ability and occupational choice are mentioned as phenomena driving both the level of entrepreneurial income and education (Griliches and Mason 1972, Blackburn and Neumark 1993).3 Second, measurement errors associated with education can also lead to endogeneity (Griliches 1977, Angrist and Krueger 1991). These measurement errors push the estimated return to education toward zero because they lead to variation in the education variable that has no effect on income.4 Other causes include 1

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