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. Hybrid entrepreneurs allocate their time between paid work (labor) and working on a venture. Traditionally, it is thought that the paid job sector is stable over time, and so all risks are concentrated in the entrepreneurial sector. However, the disruption of COVID-19 affected a wide variety of productive activity, and the labor market in particular became extremely turbulent for many people. As a result, it is vital to understand how risk influences how hybrid entrepreneurs allocate their time between different occupations using an optimization technique that considers the risk connected with each activity as a way to understand precautionary behavior. The method utilized in this study has the primary advantage of permitting the investigation of simultaneous risks, which can be tested in the future through experimentation. This link brings up a plethora of possibilities for exploration in the study of entrepreneurship activities utilizing modern decision theory methods.