Skip to main content
Self-Employment Versus Wage-Employment: A Dynamic Choice Model
  • Jaime Ruiz-Tagle
  • Cristian Pardo

This paper examines the question of what drives an individual to prefer self- employment over more traditional wage employment, or vice-versa. Self-employment tends to imply lower earnings and larger income variability. However, self-employment is usually associated with more independence and higher levels of job satisfaction. There are differences in expected returns as wages differ from one sector to the other, which at the same time, respond to differences in experience in each type of employ- ment. Decisions about the type of employment are inherently dynamic as choices affect both the individual’s current and future utility due to the accumulation of experience in each sector. This paper models an individual’s decision over employment type by solving a stochastic, discrete choice, dynamic optimization problem using panel data from Chile’s Social Security Survey. We simulate employment type choice under dif- ferent socioeconomic scenarios. Policy simulation and welfare analysis for a proposed mandatory unemployment insurance are also considered.

  • Self-employment,
  • job mobility
Publication Date
Citation Information
Jaime Ruiz-Tagle and Cristian Pardo. "Self-Employment Versus Wage-Employment: A Dynamic Choice Model" (2011)
Available at: