Abstract

High failure rates and low average returns suggest that too many people may be entering markets as entrepreneurs. Thus, anticipating how one will perform in the market is a fundamental component of the decision to start a business. Using a large sample obtained from population surveys conducted in 18 countries, we study what variables are significantly associated with the decision to start a business. We find strong evidence that subjective, and often biased, perceptions have a crucial impact on new business creation across all countries in our sample. The strongest cross-national covariate of an individual’s entrepreneurial propensity is shown to be whether the person believes herself to have the sufficient skills, knowledge and ability to start a business. In addition, we find a significant negative correlation between this reported level of entrepreneurial confidence and the approximate survival chances of nascent entrepreneurs across countries. Our results suggest that some countries exhibit relatively high rates of start-up activity because their inhabitants are more (over)confident than in other countries.

Keywords: Perceptions; Overconfidence

JEL classification codes: M13
Psychological classification codes: 3610

Corresponding author. Address: Erasmus University Rotterdam, Department of Applied Economics, P.O. Box 1738, 3000 DR, Rotterdam, The Netherlands. Tel.: +31 10 4088617; fax: +31 10 4089141.