Entrepreneurs think they are better than their resumes show and realize they can make more money by going it alone. And in most cases, they are right. A research paper, Asymmetric Information, and Entrepreneurship explains a new theory of why some people choose to be entrepreneurs and go out alone.
In this article, we will summarize the paper’s conclusions, and what it means to companies, entrepreneurs and entrepreneurial education. The authors’ research came from following 12,686 people over 30+ years. They found:
When you look for a job you “signal” your ability to employers via a resume with a list of your educational qualifications and work history. Signaling is a fancy academic term to describe how one party (in this case someone who wants a job) credibly conveys information to another party (a potential employer).
People choose to be entrepreneurs when they feel that they are more capable than what employers can tell from their resume or an interview. So, entrepreneurs start ventures because they can’t signal their worth to potential employers.
Overall, when people choose entrepreneurship they earn 7% more than they would have in a corporate job. That’s because in companies pay is usually set by observable signals (your education and experience/work history).
Entrepreneurs score higher on cognitive ability tests than their educational credentials would predict. And their cognitive ability is higher than those with the same educational and work credentials who choose to work in a company.
Immigrants and Funding
Signaling may explain why some groups such as immigrants, with less credible signals to existing companies, tend to gravitate toward entrepreneurship. And why funding from families and friends is a dominant source of financing for early-stage ventures (because friends and family know an entrepreneur’s ability better than any resume can convey).
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