Department of Economics, UCSC

Theoretical models of entrepreneurship posit that attitudes toward risk, entrepreneurial ability, and preferences for autonomy are central to the individual's decision between self-employment and wage/salary work.  None of the studies in the rapidly growing empirical literature on entrepreneurship, however, have been able to test whether these factors are important determinants of self-employment.  I provide indirect evidence on this hypothesis by examining the relationship between drug dealing and legitimate self-employment.  A review of ethnographic studies in the criminology literature indicates that drug dealing may represent a useful proxy for low risk aversion, entrepreneurial ability, and a preference for autonomy.

            The 1980 wave of the National Longitudinal Survey of Youth (NLSY) contained a special section on participation in illegal activities, including questions on selling marijuana and other "hard" drugs.  I use the answers to these questions and data from subsequent years of the NLSY to examine the relationship between drug dealing as a youth and legitimate self-employment in later years.  Using various definitions of drug dealing and specifications of the econometric model, I find that drug dealers are 11 to 21 percent more likely to choose self-employment than non drug dealers, all else equal.  I also find that drug dealers who sold more frequently, used drugs less frequently, or reported receiving income from drug dealing are more likely to choose self-employment than other drug dealers.  After ruling out a few alternative explanations, I interpret these results as providing indirect evidence that risk aversion, entrepreneurial ability, and preferences for autonomy are important determinants of self-employment.

Theoretical models of entrepreneurship posit that attitudes toward risk, entrepreneurial ability, and preferences for autonomy are central to the individual's decision between self-employment and wage/salary work.  None of the studies in the rapidly growing empirical literature on entrepreneurship, however, have been able to test whether these factors are important determinants of self-employment.  I provide indirect evidence on this hypothesis by examining the relationship between drug dealing and legitimate self-employment.  A review of ethnographic studies in the criminology literature indicates that drug dealing may represent a useful proxy for low risk aversion, entrepreneurial ability, and a preference for autonomy.

            The 1980 wave of the National Longitudinal Survey of Youth (NLSY) contained a special section on participation in illegal activities, including questions on selling marijuana and other "hard" drugs.  I use the answers to these questions and data from subsequent years of the NLSY to examine the relationship between drug dealing as a youth and legitimate self-employment in later years.  Using various definitions of drug dealing and specifications of the econometric model, I find that drug dealers are 11 to 21 percent more likely to choose self-employment than non drug dealers, all else equal.  I also find that drug dealers who sold more frequently, used drugs less frequently, or reported receiving income from drug dealing are more likely to choose self-employment than other drug dealers.  After ruling out a few alternative explanations, I interpret these results as providing indirect evidence that risk aversion, entrepreneurial ability, and preferences for autonomy are important determinants of self-employment.