If You Are So Smart, Why Aren't You an Entrepreneur? Returns to Cognitive and Social Ability: Entrepreneurs Versus Employees

How valuable are cognitive and social abilities for entrepreneurs' relative to employees' earnings? We answer three questions: (1) To what extent does a composite measure of ability affect an entrepreneur's earnings relative to wages earned by employees? (2) Do different cognitive abilities (e.g., math ability, language, or verbal ability) and social ability affect earnings of entrepreneurs and employees differently?, and (3) Does the balance in these measured ability levels affect an individual's earnings? Our (difference-of-difference) estimates of the returns to ability for spells in entrepreneurship versus wage employment account for selectivity into entrepreneurial positions insofar as they are determined by fixed individual characteristics. Our robust results provide the following answers to the three questions: General ability has a stronger impact on entrepreneurial incomes than on wages. Moreover, entrepreneurs and employees benefit from different sets of specific abilities: verbal and clerical abilities have a stronger impact on wages, whereas mathematical, social, and technical ability are more valuable for entrepreneurs. The balance in the various kinds of ability also generates a higher income, but only for entrepreneurs: This finding supports Lazear's Jack-of-all-Trades theory.