Then it is clear that the fact that entrepreneurs come from the extremes of the ability distribution implies that the observed post-selection cross-sectional variance in returns will be high relative to the variance in returns any individual might face. Hence, selection from the extremes of the ability distribution, arising from heterogeneous outside options, increases observed variance in returns to entrepreneurship.
The model developed in the next section shows how selection from the extremes can occur naturally in a simple, general setting, and also matches the other facts.