Why do entrepreneurs leave the market? An explanation from experimental economics in Peru

Understanding the behavior of those who start--or intend to start--a business is vital for a country of entrepreneurs such as Peru, which registered the third highest rate of active entrepreneurship worldwide in 2011, according to the Global Entrepreneurship Monitor (GEM). However, Peru also registered, in 2011, one of the highest business discontinuation rates among efficiency-based and resource-based economies. This study represents the first effort to analyze certain behavioral characteristics (risk aversion, joy of winning, overconfidence and tax collection) of a sample of necessity-driven entrepreneurs in Lima, Peru. These features might help explain, in the first place, the decision to become entrepreneurs, but also the decision to leave the market. In particular, we find that entrepreneurs are risk averse, tend to overestimate their abilities and are willing to work harder when the gross pay is higher (and are taxed) than when it is lower (and are not taxed). Altogether, these traits may explain the high discontinuation rate of businesses in Peru, one of the highest in efficiency-based and resource-based economies.