Does Prestige Matter More than Profits for Entrepreneurs?

We study whether the individual decision to become an entrepreneur, entrepreneurial profits and investment are affected by the decisions of other individuals belonging to the same social group. To overcome identification problems, we include local labor market fixed effects, social group fixed effects, and extensive controls. Moreover, we instrument the level of entrepreneurial activity in the individual's social group. The results show that in social groups where entrepreneurship is more widespread individuals are more likely to become entrepreneurs and invest more in their own businesses, even though their entrepreneurial profits are lower. This suggests that social norms create non-pecuniary benefits from entrepreneurial activity thus playing an important role in the decision to become an entrepreneur. We also evaluate alternative explanations, such as entry costs, knowledge spillovers, competition and informal credit markets. However, they do not find support in the data.