The dynamics of self-employment in the Netherlands

This paper presents a dynamic multinomial logit model to explain the transitions in and out of self-employment using a particular set of Dutch micro-paneldata, the LISS panel. By taking account of unobserved heterogeneity in the model we are able to differentiate between what Heckman (1981b) calls true and spurious state dependence. We find that past and initial labour states combined have the largest influence on choice probabilities. We also find a relative low covariance between unobserved preferences for self-employment and non participation in the labour force, whereas the preference to be self-employed has a positive covariance with the one for unemployment. The simulation results from the model support what has been found in descriptive studies: men have a higher probability to choose self-employment than women, and men with a small family are also more likely to choose self-employment than those without family.