A Time Series Model of Self-employment under Uncertainty

This paper applies the techniques of stochastic optimal control to the problem of price-taking agents choosing the optimal balance between self-employment and paid employment. The two principal innovations are the development of an intertemporal optimizing model for heterogeneous agents under conditions of uncertainty, and the application of multivariate maximum likelihood cointegration techniques to test the model and to obtain estimates of the long-run and short-run determinants of self-employment. Both risk and expected returns are found to affect the numbers in self-employment in the long run; there is also evidence that the interest rate acts as a barrier to entry in reducing self-employment in the short run and the long run.