Necessity and Opportunity Entrepreneurs through the Business Cycle

Abstract

We construct a simple model of occupational choice among agents with differing abilities. The fraction of agents creating new businesses who are low ability rises during recessions. Thus, cohorts born during recessions are on average lower quality: their businesses yield lower initial earnings, grow more slowly, and are more likely to fail. We show that, because of their effects on the ability distribution of business founders, short-lived recessions can have long-term consequences for the quality of a cohort of firms.

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