The returns to education for opportunity entrepreneurs, necessity entrepreneurs, and paid employees

We assess the relevance of formal education on the productivity of the self-employed and distinguish between opportunity entrepreneurs, who voluntarily pursue a business opportunity, and necessity entrepreneurs, who lack alternative employment options. We expect differences in the returns to education between these groups due to different levels of control over the use of their human capital. The analysis employs the German Socio-economic Panel and accounts for the endogeneity of education and non-random selection. The results indicate that the returns to a year of education for opportunity entrepreneurs are 3.5 percentage points higher than the paid employees' rate of 8.1%, but 6.5 percentage points lower for necessity entrepreneurs. Pooling the two types of entrepreneurs understates the value of education for opportunity entrepreneurs and sparks misguided hopes concerning necessity entrepreneurs. The results explain Europe/US differences in average entrepreneurial returns and cast doubt on the use of the self-employed to test signalling theory.