Conference Paper BHPS-2007 Conference: the 2007 British Household Panel Survey Research Conference, 5 July -7 July 2007, Colchester, UK
Switching costs and occupational transition into self-employment: a duration modelling approach
Contemporary dynamic theories of self-employment choice focus on occupational switching costs, and the risk associated with entrepreneurial income streams. However little or no previous research has addressed the question of what factors determine the length of time that it takes aspiring entrepreneurs to switch into self-employment. Possible switching costs suggest that choice may be subject to “hysteresis” (akin to investment under conditions of irreversibility and uncertainty). This paper presents empirical evidence on the dynamics of entrepreneurial transition drawing on data from Waves 8 to 14 of the British Household Panel Survey. The paper estimates a discrete-time duration model of the time between initial expression of aspiration to transition into self-employment. The model incorporates measures of local unemployment and house price volatility to capture uncertainty. Flexible semiparametric baselines are preferred and reveal declining hazard rates (conditional probabilities of transition). Increased local unemployment volatility has a significant negative impact on the conditional probability of transition, and dominates broad regional differences. Increased local house price volatility has a no significant impact. Conditioning the model for background and demographic characteristics reveals little relationship, apart from age, between individual characteristics and the hazard rate. However conditioning for prior economic status shows that those considering self-employment from a position of economic inactivity or illness have, other things equal, higher hazard rates. Occupational switching costs may be very different for such individuals.