Massive earthquakes, risk aversion and entrepreneurship

This paper investigates the impact of risk attitudes onthe decision to become an entrepreneur. In contrast toprevious research, we handle endogeneity issues relying on an instrumental variables strategy considering as a source of exogenous variation in risk aversion the early exposure to a massive earthquake. Using several waves of the Bank of Italy Survey of Household Income and Wealth (SHIW), we find that individuals experiencing an earthquake are significantly more risk averse. Second-stage estimates show that risk aversion has asignificant negative impact on the probability of becoming an entrepreneur. A large number of robustnesschecks confirm our main findings.