Endogenous Hours and the Wealth of Entrepreneurs

45 Pages Posted: 4 Dec 2019

See all articles by Felix Wellschmied

Felix Wellschmied

Charles III University of Madrid

Emircan Yurdagul

Charles III University of Madrid

Abstract

US entrepreneurs typically work long hours in their firms and these hours form a large part of the firms' labor input. This paper studies the role of endogenous owner hours in shaping the wealth distribution among entrepreneurs. We introduce owners' endogenous labor supply into a model of entrepreneurial choice and financial frictions. The model fits well the levels and the dispersion of wealth among entrepreneurs. Long owner hours incentivize poor, highly productive individuals to be owners and help the most productive owners to accumulate large quantities of wealth. On net, owners working long hours decreases the median owner wealth and increase wealth dispersion among owners. Differently, the ability to work sufficiently short hours incentivizes owners to run low productivity firms with high wealth to income ratios. Finally, alternative calibrations ignoring the endogenous labor supply of owners lead to owners that are much richer than in the data and overstate the effect of financial frictions in the economy.

Keywords: entrepreneurship, wealth accumulation, labor supply, firm dynamics

JEL Classification: E23, J22, J23, L26

Suggested Citation

Wellschmied, Felix and Yurdagul, Emircan, Endogenous Hours and the Wealth of Entrepreneurs. IZA Discussion Paper No. 12802, Available at SSRN: https://ssrn.com/abstract=3495779 or http://dx.doi.org/10.2139/ssrn.3495779

Felix Wellschmied (Contact Author)

Charles III University of Madrid ( email )

Emircan Yurdagul

Charles III University of Madrid

CL. de Madrid 126
Madrid, Madrid 28903
Spain

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