Abstract

In this paper, we study the impact of risk on time allocation decisions between occupations by modeling a hybrid entrepreneur who must decide how to allocate time between paid employment (labor) and working on a venture (entrepreneurship). We argue that hybrid entrepreneurs self-insure in response to income risk by managing the time they allocate between the two occupations. We provide the conditions under which an uninsurable risk (in paid employment or the entrepreneurial sector) has an unambiguous precautionary effect on the optimal time allocated to each occupation, and these conditions are based on the strengths of risk aversion and downside risk aversion. We focus on three cases: when risk affects only the entrepreneurial sector, which is the classical case studied in the occupational choice literature; when risk affects only the paid employment sector; and finally, when risk affects both sectors, as we experienced during the recent pandemic.