Innovation, Policy and Entrepreneurship Thrust Seminar - Entrepreneurial Experimentation and Duration

We propose a continuous-time model in which a risk-averse entrepreneur learns about the unknown venture quality and chooses consumption/saving and exit time by trading off the temporary pay cut during experimentation against the potential long-term success. We show that entrepreneurial duration incorporates the information about expected earnings, unobserved beliefs, and the option value to exit. We structurally estimate the model and compute the value of entrepreneurship. We find that right-censoring on duration in survey data leads to a downward bias in estimated earnings, which is at least 6.6% of salaried workers' annual wage in the US longitudinal data.