nep-ent New Economics Papers
on Entrepreneurship
Issue of 2008‒11‒11
six papers chosen by
Marcus Dejardin
Notre-Dame de la Paix University

  1. Spinoffs and the market for ideas By Satyajit Chatterjee; Esteban Rossi-Hansberg
  2. If you are so smart, why aren't you an entrepreneur? Returns to cognitive and social ability: Entrepreneurs versus employees By Joop Hartog; Mirjam van Praag; Justin van der Sluis
  3. Venture Capital and Sequential Investments By Dirk Bergemann; Ulrich Hege; Liang Peng
  4. The Apple Doesn't Fall Far From the Tree: Location of Start-Ups Relative to Incumbents By Oliver Falck; Michael Fritsch; Stephan Heblich
  5. Incumbent Innovation and Entry by Spinoff By Oliver Falck; Stephan Heblich
  6. The impact of innovation on employment: firm- and industry-level evidence from Estonia By Jaanika Meriküll

  1. By: Satyajit Chatterjee; Esteban Rossi-Hansberg
    Abstract: We present a theory of spinoffs in which the key ingredient is the originator’s private information concerning the quality of his new idea. Because quality is privately observed, by the standard adverse-selection logic, the market can at best offer a price that reflects the average quality of ideas sold. This gives the holders of above-average-quality ideas the incentive to spin off. We show that only workers with very good ideas decide to spin off, while workers with mediocre ideas sell them. Entrepreneurs of existing firms pay a price for the ideas sold in the market that implies zero expected profits for them. Hence, firms’ project selection is independent of firm size, which, under some additional assumptions, leads to scale-independent growth. The entry and growth process of firms leads to invariant firm-size distributions that resemble the ones for the U.S. economy and most of its individual industries.
    Date: 2008
  2. By: Joop Hartog (University of Amsterdam, Tinbergen Institute, IZA); Mirjam van Praag (Amsterdam Center for Entrepreneurship, University of Amsterdam, Tinbergen Institute, IZA, Max Planck Institute of Economics); Justin van der Sluis (University of Amsterdam)
    Abstract: How valuable are cognitive and social abilities for entrepreneurs' incomes as compared to employees? We answer three questions: (1) To what extent does a composite measure of ability affect an entrepreneur's earnings relative to employees? (2) Do different cognitive abilities (e.g. math ability, language ability) and social ability affect earnings of entrepreneurs and employees differently?, and (3) Does the balance in these measured ability levels affect an individual's earnings? Our individual fixed-effects estimates of the differential returns to ability for spells in entrepreneurship versus wage employment account for selectivity into entrepreneurial positions as determined by fixed individual characteristics. General ability has a stronger impact on entrepreneurial incomes than on wages. Entrepreneurs and employees benefit from different sets of specific abilities: Language and clerical abilities have a stronger impact on wages, whereas mathematical, social and technical ability affect entrepreneurial incomes more strongly. The balance in the various kinds of ability also generates a higher income, but only for entrepreneurs: This finding supports Lazear's Jack-of-all- Trades theory.
    Keywords: (Non-)Cognitive abilities, intelligence, earnings, entrepreneur(ship), wage employment, income differentials
    JEL: J23 J24 J31 J44 M13
    Date: 2008–11–04
  3. By: Dirk Bergemann (Cowles Foundation, Yale University); Ulrich Hege (Dept of Finance and Economics, HEC School of Management); Liang Peng (Leeds School of Business, University of Colorado)
    Abstract: We analyze sequential investment decisions in an innovative project that depend on the investor's information about the project failure risk and its potential final value. We consider the feedback effects between learning about the project parameters and the continuous adjustment of the investment strategy. Investors decide sequentially about the speed of investment and the optimal degree of involvement. We develop three types of predictions from our theoretical model and test these predictions in a large sample of venture capital investment in the U.S. for the period of 1987-2002. First, the investment flow starts cautiously if the failure risk is high and accelerates as the projects mature. Second, the investment flow reacts positively to information that arrives while the project is developed. We find that interim information is more significant for investment decisions than the information prior to the project launch. Third, investors distribute their investments over more funding rounds if the failure risk is larger.
    Keywords: Venture Capital, Sequential investment, Stage financing, Intertemporal returns
    JEL: D83 D92 G11 G24
    Date: 2008–10
  4. By: Oliver Falck (Ifo Institute for Economic Research); Michael Fritsch (University of Jena, School of Economics and Business Administration, Max Planck Institute of Economics, and German Institute for Economic Research (DIW)); Stephan Heblich (Max Planck Institute of Economics, Entrepreneurship, Growth, and Public Policy Group)
    Abstract: New firm location decisions, relative to incumbents may be based on a choice between two types of advantages: natural advantages or those that arise from social embeddedness, the latter of which may particularly include knowledge spillovers. We analyze the relative importance of geographically bounded location factors based on data from 103 manufacturing industries across 327 West German and 111 East German districts. Our micro-geographic analysis reveals that the two parts of the country vary in their pattern of new firm location. In East Germany, only 5 percent of the industries reveal start-up localization patterns beyond what natural advantages would suggest compared to 40 percent in West Germany.
    Keywords: Entrepreneurship, Location Decision, Natural Advantages, Local Knowledge Spillovers
    JEL: L26 R11 O18
    Date: 2008–11–03
  5. By: Oliver Falck (Ifo Institute for Economic Research, CESifo and Max Planck Institute of Economics, Jna, Germany); Stephan Heblich (Max Planck Institute of Economics, Jena, Germany)
    Abstract: This paper takes a different perspective toward the escape entry incentive of incumbent firms to innovate. New entrants spawned from incumbents are not necessarily a threat; they can complement incumbents' production by commercializing knowledge incumbents are not willing or able to exploit. Accordingly, incumbent innovation determines exploitable knowledge externalities for spinoffs while, at the same time, spinoffs are expected to influence incumbent innovation. To overcome this problem of endogeneity, we apply an IV approach to analyze a rich industry-level dataset (1987–2000) for Germany. We find evidence that entry by spinoffs does, indeed, have a positive impact on incumbent innovation.
    Keywords: Innovation, Entry, Spinoff
    JEL: O3 L16 M13
    Date: 2008–11–04
  6. By: Jaanika Meriküll
    Abstract: This paper investigates the implication of innovation on employment at the firm and industry levels. The paper contributes to the literature in two respects. First, it proceeds from the data of a catch-up country undergoing a very rapid economic development. Most of the empirical investigations use data from developed and technologically leading countries. The second contribution concerns the nature of the data in use; we develop a unique database merging the data of the Estonian Commercial Register with two consecutive Estonian Community Innovation Surveys (CIS), the CISIII for 1998-2000 and CISIV for 2002-2004. Our results coincide with the results on developed economies in the respect that innovation activity has a positive effect on employment and that product innovation has a stronger and a more positive employment effect. Both of these effects are consistent over firm and industry levels. This result is also confirmed by the insignificance of the spillover effects of an industry\'s innovation on employment by firms
    Keywords: innovation (technological change), employment, catch-up economy
    JEL: J23 O33 D21
    Date: 2008–10–30

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