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The classical occupational choice model does not explain the simultaneous existence of low and high ability entrepreneurs. In this paper, we study the decision to become an entrepreneur when individuals choose their education level and the economic sector where to operate. We distinguish two sectors: the knowledge and the traditional sector. The knowledge sector requires individuals to invest in education. Under this framework, two results are possible: one where only high ability individuals become entrepreneurs, and one with the coexistence of low and high ability entrepreneurs. This framework provides a rational explanation of the relationship between ability, education, and self-employment. Using PIAAC data, we test the empirical implications of the model. We find that most countries have an equilibrium with low and high ability entrepreneurs.

Who Becomes an Entrepreneur? The Role of Ability, Education, and Sector Choice