Opportunity Costs and Entrepreneurial Activity

tzLSEk'IER

OPPORTUNITY COSTS AND ENTREPRENEURIAL ACTIVITY

R A P H A E L AMIT University of British Columbia, Vancouver, Canada EITAN MULLER*

Tel Aviv University, Israel

IAIN C O C K B U R N University of British Columbia, Vancouver, Canada

We provide empirical support for the hypothesis that the lower the opportunity costs of individuals, the more likely they are to undertake SUMMARY entrepreneurial activity. This prediction emerged from earlier theoretical work in which we modeled the decision of individuals to develop new ventures on their own, seek the backing of a venture capitalist, or remain as paid employees. We use a large sample, drawn from the 1992 Canadian Labor Market Activity Survey. We find that paid employees who choose to leave their employment to become entrepreneurs earned, prior to leaving, substantially less on average then those whose employment status did not change and who remained paid employees throughout the survey period. Specifically, we establish that the wages of those workers who chose to remain paid employees throughout the survey period were, on average, 12% higher than the wages of those who left their employment to become entrepreneurs. To obtain this result, we performed a multivariate regression analysis in which we isolated the effect of employment status by controlling for gender, age, education, marital status, and region of the country. The employment-status coefficient was 2349 (t = 2.644; p = .008), indicating that new entrepreneurs earned in 1988, on average, $2349 less than paid workers, ceteris paribus. In other words, 1988 paid employees who chose to become

EXECUTIVE

Address correspondence to Professor Raphael Amit, Faculty of Commerce & Business Administration, University of British Columbia, Vancouver, BC, Canada V6T I Z2. The authors gratefully acknowledge the f'mancial sup~)rt of the UBC EntrepreneurshLp and Venture Capital Research Centre and the Social Sciences and Humanities Research Council of...