Understanding small business heterogeneity

"In this paper, we show that substantial heterogeneity exists among U.S. small businesses owners with respect to their ex-ante expectations of future performance, their ex-ante desire for future growth, and their initial motives for starting a business. Specifically, using new data that samples early stage entrepreneurs just prior to business start up, we show that few small businesses intend to bring a new idea to market. Instead, most intend to provide an existing service to an existing customer base. Further, using the same data, we find that most small businesses have no desire to grow big or to innovate in any observable way. We show that such behavior is consistent with the industry characteristics of the overwhelming majority of small businesses, which are concentrated among skilled craftsmen, lawyers, real estate agents, doctors, small shopkeepers, and restaurateurs. Lastly, we show non pecuniary benefits (being one's own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We conclude by discussing how failing to acknowledge the ex-ante heterogeneity can lead to biased inferences of the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions from the ex-post distribution of firm size"--National Bureau of Economic Research web site.