Self-Employment as a Signal: Career Concerns with Hidden Firm Performance

Abstract

We study a stationary labour market in which risk-averse workers privately know their permanent talent and choose, period by period, between risky self-employment, whose outcomes become part of a portable public record, and firm employment, which pays a competitive wage but keeps individual performance hidden from the outside market. Because each worker decides whether to generate another public outcome or to apply to a firm, both the population holding a given record and the pool of applicants at that record are endogenous. Market beliefs are therefore constructed in two stages: first from the stationary flow of types through all histories leading to---and retaining---each record, and only then by conditioning on the current application decision. It is shown that, when the effective continuation factor is below one half, a stationary sequential competitive equilibrium exists and occupational choice follows a talent cutoff at every record; the equilibrium need not be unique, and an explicit example with two distinct equilibria is provided. Firm employment persists whenever it is strictly optimal for a given type at a given record. At any on-path record where both occupations are chosen, higher-talent workers select into self-employment, and the applicant wage lies below mean talent among holders of that record; this discount decomposes exactly into the self-employed share and the talent gap between the two groups. The model yields within-record predictions for occupational choice, wages, subsequent performance, and the duration of opaque employment spells.