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Occupational choice and the private equity premium puzzle

A model for the return on private equity can be viewed as the sum of two components – the individual ability of the entrepreneur and idiosyncratic business risk. Thomas Hintermaier of the Institute for Advanced Studies and Thomas Steinberger of the European University Institute offer a solution to what has become known as ‘the private equity premium puzzle' (Moskowitz and Vissing-Jorgensen, 2002).

Moskowitz and Vissing-Jorgensen's paper concluded that a portfolio made up of public equity investments offered a more attractive risk-return trade-off than one including private equity investments. Hintermaier and Steinberger respond to this paper by using numerical techniques to show the return structures for private equity investments.

Copyright © Thomas Hintermaier and Thomas Steinberger

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Founded in 1963, the Institute for Advanced Studies is the first institution for postgraduate education and research in economics and the social sciences in Austria. For more information please visit www.his.ac.at

With kind permission of the Institute of Advanced Studies, No. 122 of the Economics Series of the Institute.