chapter 7 Inferring the Unobserved Human Capital of Entrepreneurs

The goal of the paper by Bhattacharjee et al. is to study the role of labour<br />market characteristics in entrepreneurial choice and its impact on the survival<br />of newly created firms. Their starting point is that, when starting a new<br />business, an entrepreneur's labor market situation (e.g. employed or not –and<br />whether or not in the preferred sector-) reflects how his human capital may<br />be valuated through salaried labor, the alternative for entrepreneurship.<br />Hence, Bhattacharjee and coauthors view the labor market situation preceding<br />entrepreneurship as an indicator of the amount of unobserved human capital<br />people have. More in particular, when an individual sets up a firm in the same<br />sector of experience, this may indicate a high average level of unobserved<br />human capital due to a lack of depreciation motive. The authors test the<br />hypothesis that an individual's previous labor market situation affects the<br />predictive value of observed human capital for surviving as an entrepreneur.<br />The results show that the impact of education on the new firm's survival is<br />indeed most pronounced for firms created by individuals salaried in their<br />preferred branch of activity while it is rather limited for other entrepreneurs