NORC at the University of Chicago

Entrepreneurship
Author(s): EdwardP. Lazear
Source: Journal of Labor Economics, Vol. 23, No. 4 (October 2005), pp. 649-680
Published by: The University of Chicago Press on behalf of the Society of Labor
Economists and the NORC at the University of Chicago
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Entrepreneurship
Edward P. Lazear,

Hoover Institution and

Stanford University

The theory below is that entrepreneurs must be jacks-of-all-trades

who need not excel in any one skill but are competent in many. A
model of the choice to become an entrepreneur is presented. The
primary implication is that individuals with balanced skills are more
likely than others to become entrepreneurs. Using data on Stanford
alumni, the predictions are tested and found to hold. Those who have
varied work and educational backgrounds are much more likely to
start their own businesses than those who have focused on one role
at work or concentrated in one subject at school.

What is entrepreneurship? Economic growth may be related to the formation of new businesses, but what is it exactly that entrepreneurs do?1
The view of entrepreneurship taken here is that it is the process of assembling necessary factors of production consisting of human, physical,
and information resources and doing so in an efficient manner. Entrepreneurs put people together in particular ways and combine them with
physical capital and ideas to create a new product or to produce an existing
I thank first Boyan Jovanovic for a useful derivation that is used in this article.
Comments from Anat Admati, Uschi Backes-Gellner, George Baker, Gary Becker,
Lanier Benkard, Jennifer Hunt, Andrea Ichino, Stephen Jones, Kenneth Judd,
David Kreps, Robert Lucas, John McMillan, Paul Oyer, Canice Prendergast, Korok Ray, John Roberts, Kathryn Shaw, Steven Tadelis, Robert Wilson, Justin
Wolfers, and Jeffery Zwiebel are gratefully acknowledged. Able research assistance
was provided by Yuliy Sannikov on theoretical issues and Eugene Kwok and
Zeynep Emre on data compilation.
1
Lazear (1995) found that those Eastern European economies that grew the
fastest during the transition from communism to market economies were those
for which new business formation was most rapid.
[ Journal of Labor Economics, 2005, vol. 23, no. 4]
2005 by The University of Chicago. All rights reserved.
0734-306X/2005/2304-0001$10.00

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650

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one at a lower or competitive cost. Because the entrepreneur must bring

together many different resources, he or she must have knowledge, at
least at a basic level, of a large number of business areas. An entrepreneur
must possess the ability to combine talents and manage those of others.
Why do some choose to become entrepreneurs, and what characteristics
create successful ones? Most of the past work on entrepreneurship has
been empirical,2 but it is useful to have theory to guide the empirics and
to assist in interpretation of the results.3
It is tempting to argue that the most talented people become entrepreneurs because they have the skills required to engage in creative activity.
Perhaps so, but this flies in the face of some facts. The man who opens
up a small dry-cleaning shop with two employees might be termed an
entrepreneur, whereas the half-million-dollar-per-year executive whose
suit he cleans is someone elses employee. It is unlikely that the shop
owner is more able than the typical executive.
The reverse might be true. As necessity is the mother of invention,
perhaps entrepreneurs are created when a worker has no alternatives.
Rather than coming from the top of the ability distribution, they are what
is left over.4 This argument also flies in the face of some facts. Any ability
measure that classifies John D. Rockefeller, Andrew Carnegie, or, more
recently, Bill Gates near the bottom of the distribution needs to be
questioned.
The idea explored below is that entrepreneurs differ from specialists in
that entrepreneurs have a comparative disadvantage in a single skill but
have more balanced talents that span a number of different skills. Specialists can work for others who have the talent to spot and combine a
variety of skills, but an entrepreneur must possess that talent. Although
entrepreneurs can hire others, the entrepreneur must be sufficiently well
versed in a variety of fields to judge the quality of applicants.
How shall we define entrepreneur? There are a number of possible
definitions. In keeping with the empirical analysis to be performed below,
an entrepreneur is defined for this study as someone who responds af2
See, e.g., the early paper by Evans and Leighton (1989) and the more recent
one by Hamilton (2000), who examines the returns to self-employment.
3
The theoretical papers on the subject rarely speak to the issue that is central
to this article. For example, Otani (1996) examines the theoretical relation of firm
size to entrepreneurial ability. Perhaps the closest to this study in terms of discussing specialization (although from a very different point of view) is Holmes
and Schmitz (1990), where it is argued that certain agents specialize in entrepreneurial skills. This differs from the approach here, where entrepreneurial skills
are implicitly defined to be a cross section of all possible skills. De Meza and
Southey (1996) build a model where new entrants are excessively optimistic.
4
Landier (2002) argues that the part of the ability distribution from which
entrepreneurs are drawn may differ across countries and provides a multiple
equilibrium approach in an information framework to discuss the differences.

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Entrepreneurship

651

firmatively to the question I am among those who initially established

the business. Such individuals, even if they leave the business early, are
usually responsible for the conception of the basic product, hiring the
initial team, and obtaining at least some early financing. Other definitions
are possible. For example, CEOs who reinvent a company might also
consider themselves entrepreneurs. Conceptually, the model is consistent
with including this latter group in the collection of entrepreneurs, but
they will be excluded (with one exception) in the empirical analysis. The
definition is conceptually distinct from self-employed. A self-employed
person need not have any other employees, and the kinds and combinations of skills that are necessary for real entrepreneurship are less important for, say, a self-employed handyman who works alone. At the
empirical level, self-employed individuals are entrepreneurs if they view
themselves as having started a business.
The model presented below is one where an individual can decide to
become an entrepreneur using a variety of skills or to specialize using
only one. The model is tested using data on graduates from the Stanford
Graduate School of Business. The data combine information on postgraduate work experience and incomes with courses taken and grades
obtained when the individuals were attending the Stanford Graduate
School of Business.
The primary theoretical predictions are:
1.
2.
3.

Individuals with more balanced skill sets are more likely to

become entrepreneurs.
The supply of entrepreneurs is smaller for production processes
that require a higher number of independent skills.
Individuals who become entrepreneurs should have a more balanced human capital investment strategy on average than those
who become specialists.

A number of the predictions are tested empirically using data on Stanford alumni and are borne out. Specifically, those who end up being
entrepreneurs are more likely to have varied backgrounds, both in school
and on the job. The probability of being an entrepreneur in an employment spell is positively related to the number of different roles that an
individual has had over his or her career and with the generality of the
curriculum followed when at school. Some of this reflects balanced skills
that the individual possesses before entering the labor market and some
reflects the balance that is acquired after entering the workforce. There
is also some evidence that risk tolerance enters into the decision to become
an entrepreneur. Specifically, those individuals who have displayed willingness to choose risky occupations in the past are more likely to become
entrepreneurs.

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652

Lazear

A Model of the Choice to Become an Entrepreneur

Initially, let there be only two skills, denoted x1 and x2 with x1, x 2
0. An individual can be a specialist, in which case he receives income
associated with his best skill, or he can be an entrepreneur, in which case
he is limited by his weakest attribute. Thus, for specialists,
Specialist income p max [x1 , x 2 ].

(1)

Entrepreneurs, however, must be good at many things. Even if they do

not do the job themselves, they must know enough about a field to hire
specialists intelligently. The jack-of-all-trades aspect of entrepreneurship
is captured in the income function
Entrepreneur income p l min [x1 , x 2 ],

(2)

where l is a parameter that is determined by market equilibrium that

establishes the value of an entrepreneur. The value of l, which is called
the market value of entrepreneurial talent, will be derived below.
The income-generating functions described in (1) and (2) may seem
special, but they are implied by a general production function that exhibits
constant returns to scale and ability distributions that are symmetric. This
is shown in the appendix, entitled The Underlying Economy.5 Creativity and willingness to take risks are two factors that are often mentioned
as affecting the decision to become an entrepreneur.6 Creativity is suppressed in this model because it is unobservable. Formally, more creative
individuals can be thought of as those with larger values of l. They have
higher market values for entrepreneurial talent because a given amount
of raw skill translates into more entrepreneurial output. Risk preference
is simply ignored in this model where everything other than endowment
of x1 and x2 is deterministic.7 Risk can be thought of as entering through
a stochastic l.
5

The perfect substitutes/perfect complements income function is extreme, but

it is an expository convenience. Any production process that has complementarity
of skills for entrepreneurs and substitution of skills for specialists would be consistent with the intuition.
6
Kihlstrom and Laffont (1979) were the first to argue that entrepreneurs tend
to be less risk-averse than others in society. Iyigun and Owen (1998) suggest that
entrepreneurship is risky and risk-averse agents are less likely to go into entrepreneurship in a developed economy where a larger selection of safer (insured)
jobs exists.
7
Becker and Murphy (1992) use a similar notion of specialization. Becker and
Mulligan (2002) apply a technology somewhat like the one in this article to discuss
the difference between market (specialized) and household (generalized) work.

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Entrepreneurship

653

Fig. 1

Who Becomes an Entrepreneur?

Who decides to become an entrepreneur and who decides to become
a specialist? The decision is straightforward. Think of individuals as being
endowed with a pair of skills (x1, x2).8 The joint density on x1 and x2 is
given by g(x1, x2). The individual chooses to become an entrepreneur if
and only if
l min [x1 , x 2 ] 1 max [x1 , x 2 ].

(3)

It is easiest to see this graphically. A given individual is endowed with

x1 and x 2, shown as a point in figure 1. For all points below the 45 line,
x1 1 x 2, so that a specialist whose endowment lies below the 45 line would
always choose to specialize in x1 and would have income given by x1;
x 2 is irrelevant to this specialist. In order for that individual to prefer
being an entrepreneur to being a specialist, it is necessary that
l min [x1 , x 2 ] 1 max [x1 , x 2 ],
8
Lucas (1978) offers a model in which an individual can choose to work for
someone or to be an entrepreneur. The difference between Lucass model and
this one is that, in Lucas, managerial talent is distinct from labor talent. Here,
workers and managers have the same two skills, just in different combinations.
The complementarity between skills that is the essence of this story is absent
from Lucas. Still, Lucas derives implications for the size distribution of firms that
are similar to those derived below.

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Lazear

which here requires that

lx 2 1 x1
because min [x1 , x 2 ] p x 2 and max [x1 , x 2 ] p x1.
Thus, for individuals for points below the 45 line, the condition for
entrepreneurship is
x 2 1 x1 /l.

(4)

This is shown as the shaded area on the diagram between the lines
x1 p x 2 and x 2 p x1 /l. The area below the line x 2 p x1 /l corresponds
to points where the individual specializes and receives income x1.
Above the 45 line, the converse is true. Here, x 2 1 x1 so the specialist
receives income x 2. In these cases, the condition for entrepreneurship, that
l min [x1 , x 2 ] 1 max [x1 , x 2 ]
becomes
lx1 1 x 2 ,
so an individual for whom x 2 exceeds x1 becomes an entrepreneur when
x 2 ! lx1.

(5)

This is shown as the cross-hatch area in the diagram. The region in the
northwest corner corresponds to individuals who have sufficiently high
values of x 2 relative to x1 that it pays for them to specialize in x 2 and to
receive income x 2.
The probability of becoming an entrepreneur for any l is given by the
probability that the pair of skills lies in one of the two shaded areas in
figure 1 or

lx1

prob of entrepreneur p

g(x1 , x 2 )dx 2 dx1.

(6)

0 x1 /l

It is now possible to derive and explain intuitively how the entrepreneurial decision varies with a number of different parameters. First, consider l, the market value of entrepreneurial talent. Differentiate (6) with
respect to l to obtain

prob
p
l

( )]

g(x1 , lx1 )x1 g x1 ,

x1 x1
dx ,
l l2 1

which is positive.
The higher is l, the more likely is the individual to become an entre-

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Entrepreneurship

655

preneur. Diagrammatically, as l increases, the shaded areas become larger

because the borders move toward the axes. If l were infinity, everyone
would become an entrepreneur since for any positive values of x1 and
x 2 entrepreneurial income would be infinite. As l goes to one, the shaded
areas get pinched. When l p 1, the borders of the shaded area are the
line x1 p x 2, and there are no entrepreneurs. Obviously, if l p 1, it is
impossible for condition (3) to hold since the min of something can never
exceed the max of that same thing.
This result is important for equilibrium. The market value of entrepreneurial talent, l, is a parameter that determines the supply of entrepreneurs in an economy. As l rises, everyone chooses to become an
entrepreneur. As l falls to one, no one opts for entrepreneurship. This
will guarantee an interior solution for l and will ensure that there is a
finite number of individuals wanting to enter entrepreneurship.
It is also possible to think of l as being person specific. Some individuals
have a comparative advantage in entrepreneurship. This might relate to
creativity or other skills, but it is reflected in high values of l. Since such
talents are generally unobservable, not much more is said about the idiosyncratic variation in l.9
If l is person specific, it might also be unknown. This would explain
why some people try entrepreneurship and then switch back to working
for others. Perhaps individuals must try being an entrepreneur before
they know whether they have a natural talent for running their own
business. There is some evidence of this. There is a significant fraction of
individuals who move back to working for others after having been an
entrepreneur, but the probability is about 10 times as high that a year as
an entrepreneur is succeeded by another year as an entrepreneur than by
a year working for someone else.
Balance
In what follows, it is shown that as the correlation between x1 and
x 2 rises, the supply of entrepreneurs increases. Before deriving this formally, we state the intuition. Since entrepreneurial output and income is
determined by the weakest link, it does little good to have a high value
of x1 if x 2 is not also high. Under such circumstances, it is necessary that
x 2 be high whenever x1 is high or there is little chance that an individual
9

One of the skills can be interpreted as the ability to raise capital. This argument
is central to Evans and Jovanovic (1989). Holtz-Eakin, Joulfaian, and Rosen (1994)
show that capital is important in starting a business by linking the receipt of an
inheritance to the likelihood of starting a business. Recent work by Gentry and
Hubbard (2002) explores the relation of saving to entrepreneurial investment.
Their motivation is growth and macroeconomic factors, but the results are relevant
to this study as well. They find that there is an interdependence between entrepreneurial saving and investment.

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656

Lazear

will become an entrepreneur. Diagrammatically, for any given l, a larger

proportion of the population prefers to be entrepreneurs, the more points
lie in the shaded area of figure 1. The shaded area consists of points where
x1 and x 2 are close in value. For small values of l, only points very close
to the x1 p x 2 line result in choosing to become an entrepreneur. If most
of the mass of the distribution lies close to the axes, then individuals will
be inclined to specialize in one or the other skill because they have a
strong absolute advantage in one skill. Entrepreneurs are jacks-of-alltrades, which means that they must be relatively good (or relatively bad)
at everything.10
Formally, let x 2 be defined in terms of x1 as follows:
x 2 p rx1 (1 r)n,
where x1 has density f(x1 ) and n has density h(n) . When r p 1, x1 and x2
are perfectly correlated. When r p 0 , they are uncorrelated. In fact, r is
the correlation coefficient between x1 and x 2 . The probability of being an
entrepreneur in (6) can be rewritten as

prob of entrepreneurship p

(lx1rx1 )/(1r)

f(x1 )h(n)d ndx1

(7)

0 [(x1 /l)rx1 ]/(1r)

by using a standard change of variables and altering the limits of integration appropriately.
Next, differentiate (7) with respect to r to obtain

h(UL)

UL
r

h(LL)

LL
r

f(x1 )dx1 ,

where UL and LL stand for upper and lower limits of the inside integral
in (7). After substitution, this becomes

p
r

h(UL)

x1 (l 1)
x1 (1 1/l)
h(LL)
f(x1 )dx1 ,
2
(1 r)
(1 r) 2

which is positive since density functions are always positive and since
l 1 1 for there to be any entrepreneurs in the economy at all. Thus, as
10

Stopford and Baden-Fuller (1994) list five components (proactiveness, team

orientation, dispute resolution skills, being innovative, and ability to learn) that
are important in entrepreneurship. Thus, an entrepreneur might be someone who
was highly endowed with each of the five factors.

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Entrepreneurship

657

correlation increases between the two variables, the proportion of entrepreneurs rises.
The idea that balance is important suggests that the supply of entrepreneurship may vary by industry. For example, consider insurance agencies. The ability to understand complex insurance policies is a skill that
is likely to be correlated with the accounting and management skills necessary to run a business. As a result, there are many who are well suited
to running their own agencies and so the number of agencies should be
great and their average size small.
An alternative example involves artists. Because art and business are
quite distinct skills, there is no reason to expect strong positive correlation
between artistic talent and business skills. As long as both artistic and
business skills are relevant for production in the art business, then few
will have high enough levels to avoid specializing in one or the other
aspect of the business. Thus, the supply of entrepreneurial talent in art
would be expected to be low, so most artists must be managed by others.
The prediction is that there would be very few artists who run their own
studios and publicize their own work.
The empirical statements are verifiable by looking at real world data.11
In situations where entrepreneurs are rare, a few must run the whole
industry, driving up concentration ratios. In situations where many opt
to be entrepreneurs, the concentration ratios should be low. Of course,
other technological considerations are key here and must be held constant.
If scale economies are more important in some industries (e.g., automobiles) than in others (e.g., restaurants), the concentration ratios are
likely to be higher in the former than the latter, independent of entrepreneurial supply considerations.
Complexity of Production
Some production processes are very complex, requiring many skills in
order to produce output. Others are relatively straightforward. As the
world has become complex, a larger variety of skills may be required to
be an entrepreneur. In an agrarian society, a farmer did not require too
many business skills to run his small farm and get his produce to market.
The founders of the modern corporation are a different breed. They are
more than competent technicians; they must understand how to create a
worldwide business.
What happens to the supply of entrepreneurs as the number of factors
increases? Without being more specific about the distribution of the factors, it is impossible to make qualitative statements. However, it is possible
11
To make statements about groups, it is necessary to show that the propositions
are true in a statistical sense at the level of the population. This is derived in the
appendix.

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658

Lazear

to show that the introduction of independent factors always reduces the

supply of entrepreneurs.
Consider the original joint density g(x1, x2). Now introduce a third
factor, x 3, and let the density of the three be denoted k(x1, x2, x3). If x 3
is an independent factor with (marginal) density m(x 3 ) , then it is possible
to write
k(x1 , x 2 , x 3 ) p

{
m(x 3 )

g(x1 , x 2 )dx 2 dx1 dx 3 .

The condition necessary to ensure an entrepreneur for two variables must

still hold. For any given x3 and for a given l, if the projection onto the
(x1, x2) plane does not lie in the entrepreneurial area, the individual will
not choose to be an entrepreneur. That is, if
l min [x1 , x 2 ] ! max [x1 , x 2 ],
the individual becomes a specialist, irrespective of x3. In addition, there
are some potential cutoff values, x*3 and x**
3 , that are also required for
entrepreneurship. So the probability of being an entrepreneur cannot
exceed

x**
3

lx1

m(x 3 )

x*3

g(x1 , x 2 )dx 2 dx1 dx 3 ,

0 x1 /l

which can be written as

lx1

{M(x**)
M(x*)}
3
3

g(x1 , x 2 )dx 2 dx1.

0 x1 /l

Since the first term cannot exceed one, the probability of being an entrepreneur cannot be higher with three factors than with two and, in
general, must be lower.
The proof can be repeated, adding one factor at a time. Therefore, the
supply of entrepreneurs falls as the production process requires more
independent skills. More individuals can run family farms than multinational, multiproduct conglomerates.
There is some relation between correlation of skills and complexity.
For example, it is possible to think of being an accountant as requiring
only one skill, namely, accounting, which can be used to serve clients or
run the business. A skill is necessarily perfectly correlated with itself, so
the probability that individuals possess all the skills necessary to run an
accounting business, other things equal, might be thought to be higher

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Entrepreneurship

659

than that associated with running an art business, where two distinct skills
are required.
The Premium to Entrepreneurship
It is now straightforward to show that an equilibrium l always exists.
To make things simple, but without loss of generality, suppose that there
are a fixed number of firms in an economy and each firm requires one
and only one entrepreneur. Then the demand for entrepreneurs is perfectly
inelastic at q*, where q* is the number of entrepreneurs demanded. Let
the number of individuals in the labor force be given by N. Then, using
(6), which defines the probability of being an entrepreneur as a function
of l, the supply of entrepreneurs is simply

lx1

g(x1 , x 2 )dx 2 dx1.

0 x1 /l

Market equilibrium occurs when l is set such that

lx1

g(x1 , x 2 )dx 2 dx1 p q*.

(8)

0 x1 /l

Equation (8) is one equation in one unknown, namely l, which determines

the equilibrium value of entrepreneurship. The market value of entrepreneurial talent adjusts to induce enough individuals to become entrepreneurs so that demand is satisfied. When l p 1 , no one chooses to be
an entrepreneur. As l r , all choose to be entrepreneurs so there must
be l that sustains N* as the equilibrium number of entrepreneurs. This
is true for any demand for entrepreneur function. There is always an
intersection of demand with supply, although corner solutions are
possible.
Investment
So far, x1 and x 2 have been taken as given. But much of economic
activity as it relates to labor markets involves investment in skills. It is
important to take investment in skills into account both for the purposes
of completing the theory and in order to allow predictions for empirical
analysis.
Augment the previous model by defining x10 as the initial stock of skill
x1 , x 20 as the initial stock of skill x 2, and x1 and x 2 as the (final) attained
level. Let a particular individual, with endowed skills (x10, x 20 ) , obtain levels

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660

Lazear

of x1 , x 2, according to the cost function

C(x1 , x 2 ),
with C1, C 2 1 0, Cii 1 0.
Define x1 to be the skill with which the individual is endowed the
largest amount. This means that a worker who chooses to specialize is
likely to specialize in x1 and will solve
max x1 C(x1 , x 2 )
x1
with first-order condition
1 C1 (x1 , x 2 ) p 0.
Someone who is going to specialize will invest in only one of the two
skills. There is no value to augmenting a skill that will not be used. It is
possible that C 2 is sufficiently low relative to C1 that the individual will
ignore his higher endowment of x1 and instead specialize in x 2 . This is of
little importance. Essential here is that the specialist invests in one or the
other, but not both.
Now consider an individual who is going to become an entrepreneur.
His constraint is the minimum skill, defined to be x 2 . Should the aspiring
entrepreneur invest in x1, in x 2, or in both?
Since the constraint is x 2, there is no point in investing in x1 unless
x 2 is brought up at least to the level of x1. If there is an interior solution
for x 2, then it satisfies
l C 2 (x1 , x 2 ) p 0.
There are three possibilities, but they can be dealt with quickly. If
C 2 (x10, x 20 ) 1 l, then it does not pay for the individual to increase his stock
of x 2 and so no investment occurs. (It surely does not pay to increase
x1 since there is already an excess of x1 at x10.) If C 2 (x10, x 20 ) ! l, but
C 2 (x10, x10 ) 1 l, the individual will invest only in x 2 because it does not
pay even to bring x 2 up to the endowed level of x1. (There is no advantage
to augmenting x1 until x 2 has reached the level of x1.) In this case, the
individual specializes in investment in x 2 and behaves identically to a
specialist, except that he invests in the skill in which he is weak instead
of the skill in which he is strong, which is the more common case for
the specialist. Finally, if C 2 (x10, x10 ) ! l , then it pays for the individual to
exceed x10 in attained x 2. But now x1 becomes the constraint. As long as
C1 (x10, x10 ) ! l, the individual benefits by increasing his investment in x1
as well and continues to do so, but the optimum must have x1 p x 2 in
this case. What is important, however, is that, in this situation, the individual does not look like a specialist; he invests in more than one skill.
Investment can take a number of forms, the most important of which

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Entrepreneurship

661

is formal schooling and on-the-job training. Thus, those who eventually

become entrepreneurs should not specialize in skill acquisition, and this
might be reflected in taking a wide variety of courses.
Additionally, individuals who will eventually become entrepreneurs
should take on a variety of jobs to acquire the skills necessary to become
an entrepreneur. Thus, an individual might spend some time working in
a financial role, some time in human resources, some time as a manager,
some time as a skilled staff worker, and so forth. Having a large variety
of roles is a standard way to acquire a variety of skills and is the method
used for workers where the intention is to create a multiskilled workforce.
To summarize, those who are going to specialize invest in only one
skill. Those who become entrepreneurs may invest in one skill, but if
they do so, it will be the skill in which they are weak. But entrepreneurs
are the only individuals who may invest in more than one skill. To put
this in somewhat less stark terms, individuals who become entrepreneurs
should have a more balanced investment strategy on average than those
who end up specializing as wage and salary workers.
Innovation
No reference has been made to innovation. When thinking of the truly
successful entrepreneurs, individuals who had some new idea usually come
to mind. Even in a traditional industry such as retail, a founder like Sam
Walton of Walmart used a new business process that allowed his firm to
undercut the competition. The generalist view of entrepreneurship deemphasizes innovation, although it is not inconsistent with it. One interpretation of the value of having multiple skills is that it is easier to
innovate when the entire situation can be seen. A technical engineer may
be superb at creating a new device, but that device may not have any
business value. The innovator who succeeds is the one who can come up
with something that is not only technically sound but business relevant
as well.
Empirical Analysis
There are a number of implications that have been suggested in the
theory section above. Before going to direct tests of the model, it is useful
to provide some information on the composition of entrepreneurs.
Who Are the Entrepreneurs?
To examine the issues discussed in the theory section more directly, a
unique data set will be used. In the late 1990s, Stanford surveyed its
Graduate School of Business alumni (from all prior years). The primary
focus of the survey was compiling a job history for each of the graduates,

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662

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with special emphasis on information about starting businesses.12 This

resulted in a sample of about 5,000 respondents. In addition to the detailed
job histories, these data were matched with the student transcripts so that
it is possible to see which courses were taken by those who went on to
be entrepreneurs and which by those who became specialists. Additionally, the grade obtained in each of the courses taken is reported in the
data.
The Stanford MBA data make clear that at least among this population,
most entrepreneurs are not in technical fields. In table 1, the industries
in which Stanford MBAs are found are dominated by construction and
real estate, retail trade, and business consulting of some form. The technical fields are much less important. This finding is less surprising in these
data, given that the more technical people would likely be found in engineering rather than MBA programs at Stanford. The Stanford MBA
program recruits a significant fraction of engineers and students with
technical backgrounds but fewer than would be found in those technical
departments themselves. However, a comparison with the March 2002
Current Population Survey displays the same pattern. Among incorporated self-employed (which eliminates most household and other service
workers who work alone), the dominant industries are, in order, construction, retail trade, professional services, business services, and real
estate. Again, technical fields are minor players.
The basic hypothesis is that entrepreneurs are jacks-of-all-trades. In the
Investment section above, it was shown that individuals who want to
become entrepreneurs invest in a broader range of skills than do those
who want to become specialists. Going into any job, individuals with a
broader range of skills, acquired either through investment or through
endowments, are more likely to be entrepreneurs.13
The data allow this hypothesis to be tested. The data set is a job history
panel so that each respondent has one row of data corresponding to each
employer (including self) that he or she has held. For example, an individual who had six employment spells would have six rows of data, one
for each spell. An individual who had four employment spells and one
spell of unemployment would have five rows of data. The beginning and
ending dates for each job are recorded, as are the beginning and ending
salary and size of firm. Additionally, all roles within the employment spell
(up to five) are described through a coding system that corresponds to
occupational titles. Industry and demographic data are also provided.
12

The response rate was 40%. Some individuals were very old, and others were
no longer alive, which accounts for some of the nonresponses.
13
Lentz and Laband (1990) find that there is a higher likelihood of self-employment among the children of the self-employed. They interpret this as human
capital that is passed from one generation to the next. There are also papers on
the link between education and entrepreneurship. See, e.g., Bates (1985, 1990).

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Table 1
Industrial Breakdown of Entrepreneurs in the
Stanford MBA Sample
Industry Code
Management Consulting
Construction/Real Estate Development
Investment Management
Retail/Wholesale
Venture Capital
Hardware/Software/Systems Services
Investment Banking/Brokerage
Real Estate Finance
High TechComputers/Software
Entrepreneurial Services
Consumer Products
Entrepreneurial Manufacturing
Entertainment/Leisure/Sports
Food/Lodging
Marketing Services
Diversified Financial Services
Diversified Service
Printing/Publishing
High TechOther
Health Care Services
Extractive Mineral/Natural Resources
Telecommunications Services
Foundation/Nonprofit Organizations
Agriculture
Medical Instruments and Devices
Accounting
Import/Export/International Trade
Commercial Banking
Education
Radio/TV/Cable/Film
High TechTelecommunications Products
Energy
High TechComputers/Hardware
Industrial Equipment
Advertising
Insurance
Transportation Services/Shipping
Legal Services
Multimedia Services
High TechMultimedia Products
Rubber/Plastics
Biotechnology
Diversified Manufacturing
Public Relations
Chemical
High TechConsumer/Electronics
High TechSemiconductors
Architecture
Arts
Environmental/Waste Management/Recycling
Social Services
Unknown
Aerospace
Automotive/Transportation Equipment
High TechOptics
Apparel/Textiles
Government
Pharmaceuticals
Utilities
High TechNetworking

Percent
14.51
8.07
5.87
5.08
5.08
4.86
4.23
4.01
3.73
3.67
2.65
2.32
2.20
2.03
1.69
1.58
1.58
1.58
1.36
1.30
1.30
1.24
1.13
1.02
1.02
.90
.90
.85
.79
.79
.79
.73
.73
.73
.68
.68
.68
.62
.62
.56
.56
.51
.45
.34
.34
.34
.34
.28
.28
.28
.28
.28
.28
.28
.28
.23
.17
.17
.06
.06

Note.1,771 observations, entrepreneurs only.

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664

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Table 2
Variables and Descriptive Statistics
Variable
A. Whole sample:
mbayear
male
age
white
exp
NPRIOR
NROLES
NROLESOTH
entre
numbus
avjobten
specdif
nafter
yrleft
B. Specialists:
mbayear
male
age
white
exp
NPRIOR
NROLES
NROLESOTH
entre
numbus
avjobten
specdif
nafter
yrleft
C. Entrepreneurs:
mbayear
male
age
white
exp
NPRIOR
NROLES
NROLESOTH
entre
numbus
avjobten
specdif
nafter
yrleft

Observations

Mean

SD

Min

Max

26,901
27,283
26,863
27,283
26,778
27,277
4,877
4,216
27,283
27,283
26,737
1,996
27,262
26,588

74.27
.83
50.24
.86
9.54
3.26
5.23
4.73
.07
.39
2.03
2.49
3.76
10.74

14.21
.37
13.59
.35
9.29
3.39
3.78
3.27
.25
.79
1.70
1.13
3.73
9.93

13
0
25
0
0
0
0
1
0
0
0
0
0
0

97
1
93
1
63
37
37
32
1
5
25
9
37
45

25,120
25,482
25,081
25,482
25,010
25,476
3,710
671
25,482
25,482
24,969
1,673
24,457
23,879

74.34
.83
50.18
.86
9.14
3.10
4.67
4.60
0
.36
1.97
2.51
3.92
11.39

14.25
.38
13.65
.35
9.08
3.26
3.39
3.02
0
.75
1.68
1.14
3.74
10.01

13
0
25
0
0
0
0
1
0
0
0
1
0
0

97
1
93
1
63
37
32
21
0
5
25
9
37
45

1,781
1,801
1,782
1,801
1,768
1,801
1,167
3,545
1,801
1,801
1,768
323
2,805
2,709

73.22
.89
51.12
.86
15.25
5.55
6.95
4.76
1
.85
2.88
2.36
2.34
5.06

13.62
.31
12.76
.34
10.21
4.27
4.39
3.32
0
1.19
1.75
1.05
3.28
7.04

13
0
26
0
0
0
0
1
1
0
0
0
0
0

97
1
88
1
59
35
37
32
1
5
18
7
25
41

Number of Prior Roles

Table 2 provides the means and standard deviations of the relevant
variables used in subsequent analyses. An entrepreneurial employment
spell is defined to be one for which the respondent stated that he or she
was Founderamong those who initially started the business. The standard way to acquire human capital is through formal schooling and on-

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Entrepreneurship

665

Table 3
Proportion of Entrepreneurs by Number of Prior Roles
A. Roles

Proportion of
entrepreneurs

316

1 16

.03

.10

.29
B. Experience Level

P Low
NPRIOR

P High
NPRIOR

Difference

SE

.015
.034
.073
.099
.102
.145

.029
.073
.11
.115
.138
.187

.014
.039
.037
.016
.036
.042

.003
.005
.009
.011
.012
.022

8,163
6,971
4,597
3,415
2,965
1,148

Roles:
3 or fewer
48
913
1419
2029
30 or more
Note.P p proportion.

the-job training. Therefore, individuals who plan to become entrepreneurs

are expected to invest in general on-the-job training, where general
here refers to a variety of skills.
The unit of observation in tables 2 and 3 is the row, which consists of
an employment spell for any given individual. The key independent variable, NPRIOR, is the number of roles in total that the individual has
had before the employment spell in question. So if an individual had three
previous employers, and held two roles with the first, four roles with the
second, and one with the third, then NPRIOR would equal seven. The
dependent variable, ENTRE, is a dummy equal to one if the employment
spell is one in which the individual founded his or her own business.
About 6.6% of all employment spells (rows) are entrepreneurial ones.
Taken over the lifetime, however, about 24% of the sample started at least
one business.
Table 3 provides the initial evidence on the relation of varied background to entrepreneurship. Panel A of table 3 reports the proportion of
entrepreneurial employment spells, broken down by number of prior
roles. Only 3% of those who have had fewer than three roles are entrepreneurs, whereas 29% of those with over 16 prior roles are entrepreneurs.14 Although having more than 16 roles is well above the mean, it
is far from the maximum number of roles held by individuals. (See table
2.) The point is that the simplest statistics show that those who undertake
14
One possibility is that those who have been entrepreneurs in the past list
many roles when they are entrepreneurs and that entrepreneurship is serially
correlated. To check this, NPRIOR was redefined such that each entrepreneurial
employment was given one and only one role. The results were substantially
unaltered.

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666

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Fig. 2

many different assignments also have much higher probabilities of becoming entrepreneurs. More detail is given by the plot in figure 2. A clear
positive relation of entrepreneurship to number of prior roles is apparent.
Because it may be expected that individuals become entrepreneurs after
acquiring some on-the-job experience, it is useful to break the data up
by experience level. This is done in table 3, panel B. The column P Low
NPRIOR is the proportion of entrepreneurial spells in the group of
individuals who have the median or fewer than the number of prior roles
for this experience group. The column P High NPRIOR gives the
proportion of entrepreneurial spells in the group of individuals who have
more than the median number of roles for that experience group. Thus,
the first row of panel B shows that those with the median or fewer prior
roles were half as likely to be entrepreneurs as those with more than the
median number of roles (.015/.029). Since an individual may enter the
data set a number of times at different levels of experience, the rows are
not independent tests of the hypothesis.15 But the pattern is clear. Those
who have had more roles in the past are more likely to be entrepreneurs.
15

In fact, because experience brackets contain more than 1 year of experience,

it is possible that an individual might enter even the same calculation more than

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Entrepreneurship

667

There are two interpretations of the NPRIOR variable, both of which

are consistent with the jack-of-all-trades hypothesis. The first is that those
who are endowed with high levels of multiple skills (or have acquired
them by the time they reach the labor market) are able to perform many
roles and NPRIOR proxies a person-specific effecthigh NPRIOR are
endowed with a balanced skill set. The second interpretation is that those
who want to be entrepreneurs intentionally choose to perform a number
of roles in order to acquire a balanced skill set. This is the investment
route emphasized in the investment section above. Either interpretation
is consistent with the model. The point is that a general set of skills is
required for entrepreneurship. The existence of multiple roles is evidence
for the prior existence or acquisition of the broad skill set. Below, some
attempt will be made to distinguish between the two versions.
A Deeper Analysis
Table 4 contains the results of a deeper examination of the likelihood
of starting a business to varied background. The basic result is contained
in column 1. Each observation is a row in the work history matrix, referring to one employment spell for one individual. The data are stacked.
Two spells for one individual count the same as one spell for each of two
individuals. Columns 2 and 3 do not assume that same statistical structure,
but more on that later.
The key result is that the likelihood that an employment spell is entrepreneurial is positively and strongly associated with the number of
prior roles. The partial effect is .0851 in the logit. This translates into a
large effect. A one standard deviation increase in the number of prior
roles implies an increase in the probability of being an entrepreneur by
about .018, which is about one-fourth the probability that an employment
spell is an entrepreneurial one. The finding is again consistent with the
view that entrepreneurs have more varied backgrounds, at least in terms
of the roles that they have played at work, than nonentrepreneurs.
Although not proof of the theory, this evidence can be viewed as consistent with the premise on which the model is based. That premise is
that the entrepreneurial production technology is one that exhibits strong
complementarity among skills. The extreme formulation used for expository purposes is that entrepreneurial output is proportional to
min [x1 , x 2 ]. Given that technology, the implication is that individuals who
possess more varied skills are those most likely to be entrepreneurs. That
prediction is borne out by the data in the sense that those with general
backgrounds are more likely to start companies.
Experience is also important. Five years of additional experience inonce, say, once with 5 and once with 7 years of experience. Thus, there is not
complete independence even within a row of the table.

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Table 4
Logit Analysis Panel Data
Correlation Structure

Variable
EXP
NPRIOR
MALE
MBAYEAR
AGE

Independent
(1)

AR-1
(2)

Unstructured
(3)

Independent
(4)

Independent
(5)

Year Basis
Unstructured
(6)

Independent
(7)

.0452
(.0036)
.0851
(.0079)
.4757
(.0843)
.0070
(.0074)
.0265
(.0078)

.0502
(.0039)
.0769
(.0088)
.4562
(.0950)
.0044
(.0084)
.0250
(.0089)

.0534
(.0038)
.0706
(.0092)
.4565
(.0998)
.0054
(.0090)
.0256
(.0095)

.0070
(.0044)
.0808
(.0082)
.5266
(.0865)
.0214
(.0076)
.0117
(.0080)
.0186
(.0119)
.0786
(.0060)

.0205
(.0048)
.1166
(.0088)
.4769
(.0846)
.0094
(.0074)
.0281
(.0078)

.0341
(.0058)
.0875
(.0117)
.6021
(.1376)
.0136
(.0110)
.0299
(.0112)

.0430
(.0037)
.0764
(.0078)
.4605
(.0867)
.0218
(.0074)
.0024
(.0079)

1.583
(1.37)
281
62,229

.00090
(.00020)
5.499
(.9904)
617
21,956

NAFTER
YRLEFT
AVJOBTEN

.1218
(.0152)

SDFIRST
Constant
Wald x2
Number of observations

2.1085
(.9397)
842
26,819

2.3626
(1.0669)
706
26,663

2.2253
(1.1369)
786
26,819

.7957
(.9587)
944
26,163

Note.Dependent variable: 1 if employment spell is entrepreneurial. Standard errors are in parentheses.

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1.9849
(.9330)
876
26,779

Entrepreneurship

669

Table 5
Multinomial Logit Analysis of C-Levels, Employees, and
True Entrepreneurs
1

EXP
NPRIOR
MALE
MBAYEAR
AGE

Other

C-Levels

Other

C-Levels

.049
(.003)
.090
(.008)
.517
(.090)
.010
(.008)
.011
(.008)

.008
(.005)
.0004
(.098)
.575
(.143)
.027
(.011)
.030
(.011)

.025
(.004)

.028
(.005)

.480
(.091)
.010
(.008)
.029
(.009)
.175
(.007)

.602
(.143)
.046
(.011)
.048
(.011)
.069
(.009)

NROLES
SDFIRST
Log likelihood
Number of observations

10,540
20,920

10,325
20,920

Other
.049
(.004)
.092
(.008)
.515
(.090)
.013
(.008)
.007
(.008)

C-Levels
.008
(.005)
.001
(.010)
.577
(.143)
.024
(.011)
.026
(.011)

.00075
.00084
(.00021)
(.00032)
10,533
20,920

Note.Omitted category: true entrepreneurs.

crease the probability of being an entrepreneur by about .014, or about

one-fifth the probability that an employment spell is an entrepreneurial
one. Men are more likely to start companies than women and younger
individuals, for a given amount of experience, start more companies than
older ones.
A statistical issue is that the rows are not independent because they
belong to the same individual. For example, individuals who have already
started one company are more likely than the average individual to start
another at the next employment effect. Treating each row (employment
spell) as independent may not be appropriate under these circumstances
and the standard errors will be inconsistent. To run logit, taking into
account correlation between rows due to the panel nature of the data, the
approach of generalized estimating equations is used. The results are reported in table 4.
Columns 2 and 3 of table 5 introduce different forms of dependence
across observations to allow for the fact that the data consist of a panel
in which more than one row of data may belong to one individual. In
column 2, an AR-1 structure is assumed so that the correlation between
rows s and t for a given individual is
rFtsF.
In column 3, the correlation matrix is unstructured, and each correlation
is allowed to be free and is estimated by the data.
The key result is that the coefficient on NPRIOR is not very sensitive

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670

Lazear

to the correlation structure assumed. Even when nonindependence is

taken into account, the relation of number of roles on entrepreneurial
activity is large and significant.16
There is another potential statistical structure. Employment spells vary
in duration. To address this, let us define a person-year as the relevant
unit of analysis for the purpose of correlation structure. Every year of a
persons career constitutes a separate observation during which he or she
is an entrepreneur or working for someone else. Thus, someone who has
been in the labor force for 15 years contributes 15 observations to the
analysis. The within-job, between-year correlation structure is taken into
account in estimating the logit so that standard errors are estimated consistently. Results are reported in column 6 of table 4. It is evident that
NPRIOR maintains the same relative importance, has almost identical
magnitude, and is statistically significant.
Which Interpretation?
Already mentioned is that there are (at least) two possible versions of
the jack-of-all-trades view. One is that people are endowed with skills
and that their labor market behavior merely reflects endowed skills or
those acquired in school before they enter the labor market. An alternative
is that individuals choose to perform a variety of roles as an investment
in acquiring the broad skills necessary to become an entrepreneur. To get
at this, the panel data are helpful.
If endowed characteristics simply enable a generalist to perform many
roles, then the timing of those roles should not matter. That is, roles held
after any particular employment spell should have the same effect on
the likelihood that the spell is an entrepreneurial one as a role held before.
However, if performing many labor market roles actually enhances the
individuals ability to become an entrepreneur, then roles before any particular employment spell should be more salient than roles held after an
employment spell. Therefore, another variable, NAFTER, was created,
which counts the number of roles that an individual had in all employment
spells following the one in a given row. It is analogous to NPRIOR, but
it is defined in reverse. Rather than counting the roles held up to that
point, it counts the roles after that point. Also, just as it was necessary
to correct for experience, it is also necessary to correct for number of
years after or number of roles will pick up life cycle effects. (Those who
16
The sorting effect of individuals into different occupations picks up comparative advantage. If entrepreneurs have a comparative disadvantage as specialists,
and not merely an absolute advantage, then those who become entrepreneurs
should, when they are in training in nonentrepreneurial jobs, earn less than those
who choose to be specialists. A regression of earnings in nonentrepreneurial jobs
on EXP and a dummy equal to one if the individual ever founds a business in
the career yields a negative, albeit insignificant, coefficient on the dummy.

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Entrepreneurship

671

have a long career in the data after a particular spell will have higher values
of NAFTER, irrespective of their general skills.) YRLEFT measures the
number of years remaining until the end of the career record at the point
at which the employment spell in question occurs.
Results are reported in column 4 of table 4. Although NAFTER enters
positively, it is less than one-fourth as important in magnitude as
NPRIOR. This is evidence that multiple roles are actually productive in
preparing a person to be an entrepreneur and that they are not merely a
proxy for unobserved general skills.17 One caveat: NAFTER is defined
only for those who have a subsequent employment spell so NAFTER
might relate to a preference for changing employers. This is unlikely,
because, as discussed below, those who change employers frequently are
less likely, rather than more likely, to become entrepreneurs.
Alternative Explanations
Might the results reflect something other than the jack-of-all-trades
view? One possibility is that entrepreneurs have more roles when they
are entrepreneurs than others and that the results are spurious. Indeed,
there is some evidence that this is the case. On average, entrepreneurs
have on average 2.4 roles during their entrepreneurial job compared to
an average of 1.2 roles for all nonentrepreneurial spells.
To deal with this, a variable like NPRIOR was defined, except that
each entrepreneurial spell is allowed to add only one role to NPRIOR,
irrespective of the number of roles claimed during the entrepreneurial
employment spell. This approach intentionally biases the results against
finding a positive relation of entrepreneurial activity to the number of
roles because one role is below the mean number of roles per employment
spell. The results are qualitatively identical to those reported. The coefficient on the redefined variable is about half that on NPRIOR, but
otherwise similar.
It is also possible that those with more roles received more promotions
with their previous employer. To check this, the same models were run
including a variable that measured the final salary on the last job. This
was done only for those with at most one entrepreneurial spell so that
the prior salary would be unambiguously defined. Those with higher final
salaries do have a slightly higher probability of being entrepreneurs, but
17
The evidence is not dispositive, however. Even if large effects of NAFTER
were found, it could be that being an entrepreneur prepares a worker to take on
many roles in subsequent employment, precisely because entrepreneurs perform
many tasks. Conversely, if entrepreneurship is an absorbing state or close to it,
an entrepreneurial spell could be associated with fewer roles after because there
are fewer jobs. This is unlikely, however, because entrepreneurs have more roles
per year after a given employment spell on average than nonentrepreneurs.

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672

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the coefficient is not significant in the logits with ENTRE as the dependent
variable.
One theory, that entrepreneurs are those who are impatient, want variety, or fall into entrepreneurship accidentally because they are the individuals who change jobs often, is not borne out by the data. To examine
this hypothesis, average employment tenure defined as experience/number of employment spells was included in the logit. The result, in column
5 of table 4, is that those who have longer employment spells are more
likely to be entrepreneurs. If entrepreneurs were impatient types, the
relation of entrepreneurship to average job tenure (AVJOBTEN) should
be negative, not positive. There is surely some version of a taste argument
that can be made, but the most straightforward ones do not seem to be
consistent with the sign on AVJOBTEN.
The most frequently offered explanation of entrepreneurship is that
entrepreneurs are those who are willing to take risks. Taste explanations
are never particularly appealing unless they can be related to something
measurable. There is some hope of doing just that in the data set. Most
entrepreneurs work in other jobs before starting their own companies.
The jobs that they choose before becoming entrepreneurs can provide
some information on their preference for risk. Specifically, the data provide detailed industry/occupation codes that correspond to fields like
accounting, education, insurance, chemical manufacturing, and so forth.
There are 74 different industry/occupation categories. Some industries/
occupations are riskier than others, as can be proxied by examining the
wage distribution of individuals within these occupations. To measure
this, the standard deviation of income in each of the 74 groups was calculated. Then, each individual was classified according to the industry/
occupation of his or her first job choice after graduation from Stanford.
The standard deviation of income in that category becomes a variable
attached to the individual. The idea is that those who are less risk averse
should be willing to enter the higher income variance occupations than
the most risk averse, so that the standard deviation of income in the first
occupation measures their tolerance for risk.
The standard deviation in income of the individuals first industry/
occupation, FIRSTSD, is entered as a variable in the entrepreneurship
logit. The results are reported in column 7 of table 4.
Note first that the coefficient on FIRSTSD is positive. Those who enter
high income variance industries/occupations are more likely to have later
entrepreneurial employment spells. This is consistent with the view that
entrepreneurs are less risk averse. Of course, it could also reflect other
differences across occupations correlated with wage variance. For example,
fields with high wage variance like investment banking might attract people who think they are movers and shakers, and the same people might
also be inclined to start their own businesses. This is a taste explanation,

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and there are surely others that cannot be rejected by these data, but the
risk aversion view is consistent with the findings.
Second, even though FIRSTSD enters significantly, the coefficient and
standard errors on NPRIOR remain virtually unchanged. Even if risk or
other taste factors affect the choice to start a business, the generalist
argument still seems to apply and is not weakened by this effect.
Defining Entrepreneur
Because the definition of entrepreneur is somewhat arbitrary, another
group was defined to be entrepreneurs. They are those who reported their
position as high-level general manager, specifically, I am responsible for
the organizations overall direction, including responsibility for major
business functions and personnel decisions (examples: CEO, President,
COO, Executive Director). Although individuals in this category may
not assume the same risk as those who found a business, they are senior
general managers, so the jack-of-all-trades argument should pertain to
them as well.
To determine whether general managers are also jacks-of-all-trades, a
multinomial logit was estimated. The dependent variable can either be
entrepreneur, which is the left-out group, C-level manager, or
other. The results (see table 5, col. 1) show a significant negative coefficient on NPRIOR for those who are neither C-level managers nor
entrepreneurs relative to true entrepreneurs. But the coefficient on
NPRIOR for those who are C-levels is zero relative to the true entrepreneurs. Apparently, prior roles do not distinguish between entrepreneurs and C-level managers. The prior skills seem to be the same. So the
jack-of-all-trades story applies well to senior-level managers.
It is possible to distinguish senior managers from true entrepreneurs.
The theory suggests that those who start their own businesses must perform many tasks as entrepreneurs that are not required of C-level managers. For example, the chief technology officer need not raise funds for
the firm since the chief financial officer generally performs that task. As
a result, NROLES, which differs from NPRIOR only in that it includes
the roles performed in the current job, should be more important for true
entrepreneurs than for chief-level managers. Column 2 of table 5 contains
the results of a multinomial logit, where the comparisons are relative to
true entrepreneurs.
The multinominal logit results are as predicted. As before, NROLES
has a strong negative effect on being an employee throughout the career,
that is, it has a strong positive effect on being a true entrepreneur. More
important, NROLES also has a negative effect on being a chief-level
manager relative to being a true entrepreneur. Although having many

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roles increases the probability of having been a high-level manager, having

many roles makes one even more likely to be a true entrepreneur.
One difference between C-levels and true entrepreneurs is the amount
of risk that they face. It is likely that being a true entrepreneur is riskier
than being a C-level employee because ones own physical capital is often
at stake when starting a business. Also, high risk of failure might create
riskiness associated with true entrepreneurship. Perhaps risk preferences
help distinguish between being a C-level employee and a true entrepreneur.
Using the earlier approach, where risk aversion is proxied by avoidance
of industry/occupations with high income variance, column 3 of table 5
reports the results with SDFIRST included. There is in fact evidence that
a difference between C-level managers and entrepreneurs is that true entrepreneurs are more inclined to take risks. The SDFIRST variable enters
negatively in both the employee and C-level manager part of the multinomial logit and with almost the same magnitude. Both groups, C-level
managers and other employees, are less inclined to start out in high variance industries/occupations than those who become true entrepreneurs.
One interesting aside is that women are more likely to be employees
of others than they are to be entrepreneurs, but they are more likely to
be entrepreneurs than they are to be high-level managers. Women may
have escaped historical discrimination at very high levels of corporations
by starting their own businesses.
General and Specialized Curricula
The data on work histories were matched with data from student transcripts. As a result, we have information on the courses taken while the
individual was a student at the Stanford Graduate School of Business.
The records begin in the mid-1980s, so the transcript-matched data pertain
only to those who graduated during approximately the last 15 years. But
almost 2,000 records of alumni work history data have been matched with
transcript information, so a significant amount of information is contained
in the 15 years of records.
Simple relationships can be seen in the comparison of means in table
2. The variable SPECDIF is the difference between the maximum number
of courses taken in one field and the average number of courses taken
across fields. This is a measure of lopsidedness in the study curriculum.
SPECDIF is lower by about one-fifth of a standard deviation for entrepreneurs than it is for specialists. The difference between the average level
of SPECDIF between groups suggests that those who later become entrepreneurs took a more balanced set of courses while at Stanford.
Additionally, the simple correlation between SPECDIF and NROLES
for lifetime roles is negative and significant, as is the partial correlation,
holding constant MBA year. Those who take more specialized curricula

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Table 6
Tobit and Logits with Stanford Course Data, Number of Businesses
Started (Tobit and Ordered-Probit), and Ever Started a Business (Logit)
Variable
EXP
SPECDIF
MALE
MBAYEAR
AGE
Constant
Log likelihood
Number of observations

Logit
(1)

Tobit
(2)

Ordered Probit
(3)

.0259
(.0185)
.1458
(.0581)
.6025
(.1511)
.0318
(.0215)
.0250
(.0179)
.0202
(2.4182)
841
1,952

.0266
(.0196)
.1452
(.0592)
.6305
(.1531)
.0384
(.0224)
.0264
(.1531)
.3243
(2.4897)
1,181
1,950

.0612
(.0042)
.0433
(.0180)
.3857
(.0482)
.0241
(.0069)
.0146
(.0053)
Cut parameters
omitted

Note.Standard errors are in parentheses.

also take on fewer roles when they enter the labor market, which suggests
that generalized formal education and generalized on-the-job training are
complements.
The first analysis reported in table 6 presents logits, tobits, and ordered
probits, analogous to those in table 4, but only pre-labor-market characteristics are allowed to affect the career. The approach is to assume that
school prepares an individual for the labor market and then to observe
how differences in the educational experience are reflected in the subsequent career. The jack-of-all-trades theory suggests that those who have
large values of SPECDIF should be less likely to become entrepreneurs.
The results confirm the hypothesis. The more specialized is the curriculum, as measured by SPECDIF, the fewer businesses the individual
starts and the less likely is the individual to start a business. Once again,
it is the generalists, as reflected in generalized course curricula, who end
up founding a business after they leave school. Those who want to found
a business prepare themselves by taking a variety of different courses that
they hope will later prove useful when they start businesses. An alternative
view is that those who happen to take a varied set of courses start a
business later because the spell has given them the general skills necessary
to found a business. Both views are consistent with the jack-of-all-trades
view of entrepreneurship. Only if entrepreneurs need general skills will
a varied course background be correlated with later entrepreneurial
activity.18
18

For example, suppose that some people like variety. They take many different
types of courses and also become entrepreneurs. But those who like variety would
only become entrepreneurs if entrepreneurship offered a more varied experience,
which says that entrepreneurship is a general rather than specialized occupation.

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The results of the Stanford course data support the earlier conclusions.
Entrepreneurs are jacks-of-all-trades. They have more varied course work
while in the MBA program and have many more positions when they
are actually in the labor market.
Conclusion
Entrepreneurs are individuals who are multifaceted. Although not necessarily superb at anything, entrepreneurs have to be sufficiently skilled
in a variety of areas to put together the many ingredients required to
create a successful business. As a result, entrepreneurs tend to be more
balanced individuals.
Two kinds of evidence are provided. First, those who have more varied
careers, as evidenced by having performed more roles as part of their
work experience, are more likely to be entrepreneurs. There are two
interpretations of this result, both consistent with the jack-of-all-trades
view. The first is that the correlation between number of roles and entrepreneurship reflects endowed differences in general skills across people.
Those with more general skills can perform more roles. The second is
that the correlation reflects conscious investment, where individuals who
plan to become entrepreneurs take on many roles so that they can acquire
the varied background necessary to start a business. Each version finds
some support, but the investment view seems to dominate.
Second, the pattern of investment that occurs prior to entering the labor
market is also consistent with the generalist view of entrepreneurship. In
the Stanford MBA data, it is found that those students who study a more
varied curriculum are more likely to be entrepreneurs and to start a larger
number of businesses over their careers.
Much more can be done, especially at the empirical level, given the
richness of the data. The prevalence of entrepreneurship by occupation
and industry is predicted by the model. Educational systems differ by
country in terms of amount of specialization, and this has implications
for the proportion of entrepreneurs by country. The model gives quite
specific predictions about these relations, but investigation is left to the
future.
Appendix
The Underlying Economy
In this section, the income-generating functions shown in (1) and (2)
are derived from a more fundamental production function.19
Let there be two raw skills, y1 and y2, for example, verbal and quan19

Lucas (1978) uses this production function to discuss income distribution

and the size distribution of firms.

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titative ability. In any given firm with an entrepreneur who has the ability
pair (y1 , y2 ), output is given by
Output p Q(min (y1 , y2 ))f(Y1 , Y2 ),
where Q( ) and f( ) are parts of the production function and Y1 and Y2
are the amounts of skills employed by the firm in efficiency units. Normalize the price of a unit of output to 1 and let wages (determined by
the equilibrium) be given by w1 and w2. Then profit is given by
p(y1 , y2 , w1 , w2 ) p Q(min (y1 , y2 ))f(Y1 , Y2 )
w1Y1 w2Y2 .

(A1)

To avoid discussion of number of firms in an industry, which is not central

to the analysis, simply assume that each entrepreneur is a local monopolist.
Thus, the Q( ) function incorporates the monopoly price into the measure
of output.
Maximization of the profit function in (A1) yields the firms demand
curves for Y1 and Y2, which are written as
Yid p Yid(min (y1 , y2 ), w1 , w2 )

for I p 1, 2.

(A2)

The underlying density of skills in the overall working population is

given by g(y1 , y2 ). A1 (w1 , w2 ) is the set of individuals who choose to
specialize in supplying skill y1. It is given by
A1 (w1 , w2 ) p {(y1 , y2 )Fw1 y1
1 max [w2 y2 , p(y1 , y2 , w1 , w2 )]}.

(A3)

Analogously, A 2, the set of individuals who choose to specialize in skill

y2 is given by
A 2 (w1 , w2 ) p {(y1 , y2 )Fw2 y2
1 max [w1 y1 , p(y1 , y2 , w1 , w2 )]}.

(A4)

Finally, entrepreneurs are defined as the set

E(w1 , w2 ) p {(y1 , y2 )Fp(y1 , y2 , w1 , w2 )
1 max [w1 y1 , w2 y2 ]}.

(A5)

Then let gi (y1 , y2 ) be the density function of abilities of individuals in set

A i derived from g( ) and (A3) and (A4) and ge(y1 , y2 ) be the corresponding
density among entrepreneurs, derived from g( ) and (A5).
The following two supply-equals-demand equations determine the

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equilibrium values of w1 and w2:

and

y1 g1 (y1 , y2 )dy1 dy2

Y1d(min (y1 , y2 ), w1 , w2 )ge(y1 , y2 )dy1 dy2

(A6)

y2 g2 (y1 , y2 )dy1 dy2

Y2d(min (y1 , y2 ), w1 , w2 )ge(y1 , y2 )dy1 dy2 .

(A7)

Next, define x1 p w1 y1 and x 2 p w2 y2 where the wages are obtained from

the market equilibrium given in (A5) and (A7). Sufficient conditions to
derive income-generating functions (1) and (2) are constant returns to
scale and symmetry. Specialist income in (1) comes directly from the
definition of xi and the conditions that define sets A i . This is simply relabeling. Given that specialist income is xi , it is now shown that entrepreneurial income moves in proportion to min (y1 , y2 ) under the assumptions of constant returns to scale and symmetry. Let production
exhibit constant returns to scale such that
Q(k min (y1 , y2 ))f(kY1 , kY2 )
p kQ(min (y1 , y2 ))f(Y1 , Y2 ),

(A8)

and symmetry such that f(y1 , y2 ) p f(y2 , y1 ) and g(y1 , y2 ) p g(y2 , y1 ).

We want to show that
p(y1 , y2 , w1 , w2 ) p l min (x1 , x 2 ).
0

(A9)

0
2

Symmetry guarantees that Y1 p Y and that w1 p w2 p w. Let z p

min (y10, y20 ). Constant returns to scale implies that if entrepreneur of skill
z employs y 0 of each type of labor, then an entrepreneur of skill z  employs
(y 0 )(z  /z) of each type of labor. That, coupled with (A8) implies that
profits are equal to (z  /z)p(z, w, w). Let l { p(z, w, w)/zw. Then
p(z , w, w) p (z  /z)p(z, w, w)
p lz  /w
p (l/w) min (y1 , y2 )
p l min (x1 , x 2 ),
which is (2), the entrepreneurial income function.

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