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Date Submitted: 11/10/2011 12:16 PM

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An Economic Analysis on the Optimal Amount of Time an Entrepreneur Should Spend on Entrepreneurial Activities

December 2011

The purpose of this analysis is to model an entrepreneur/employee who can allocate his time in entrepreneurial endeavors, as an employee, or in leisure. The goal of the entrepreneur/employee is to maximize his utility as a function of income and leisure. The income the entrepreneur/employee receives is a function of his wage as an employee, and the profit from being an entrepreneur. The profit from being an entrepreneur/employee is a function of the money he invests into the business and the probability of success. The probability of success is a function of time he spends as an entrepreneur and time he spends as an employee. The entrepreneur/employee's employer chooses of how much to pay the employee. If the entrepreneur/employee is successful, then the employer must share his profits with the new firm. The employer’s profit is a function of the wage he pays the entrepreneur and the success of the entrepreneur.

I. Background

In this paper, I propose a model that depicts the decisions of an entrepreneur/employee who has the option to work for an employer or to start his own company that would compete with the employer. The entrepreneur/employee gains utility from his expected income and leisure.

The entrepreneur/employee can choose how much time to spend working as an employee, working as an entrepreneur, and in leisure. For each unit of time he spends working as an employee, he earns a fixed wage rate. The income he earns as an entrepreneur is a positive function of the time he spends working as an entrepreneur, the skills he receives from working as an employee, and the income the entrepreneur/employee invests into his company. The entrepreneur/employee’s risk preference influences the utility he gains from earning income as an entrepreneur. The employer’s goal is to maximize his profit by setting the wage the...