nep-ent New Economics Papers
on Entrepreneurship
Issue of 2009‒01‒10
six papers chosen by
Marcus Dejardin
Notre-Dame de la Paix University

  1. Entrepreneurial Success and Failure: Confidence and Fallible Judgement By Robin Hogarth; Natalia Karelaia
  2. Skill, Luck, Overconfidence, and Risk Taking By Natalia Karelaia; Robin Hogarth
  3. Spin-offs: theory and evidence By Luis Cabral; Zhu Wang
  4. Credit constraints, organizational choice, and returns to capital: Evidence from a rural industrial cluster in China By Ruan, Jianqing; Zhang, Xiaobo
  5. Product innovation and firm survival in a network industry By Fumiko Hayashi; Zhu Wang
  6. Limited participation or sticky prices? New evidence from firm entry and failures By Lenno Uusküla

  1. By: Robin Hogarth; Natalia Karelaia
    Abstract: Excess entry – or the high failure rate of market-entry decisions – is often attributed to overconfidence exhibited by entreprene urs. We show analytically that whereas excess entry is an inevitable consequence of imperfect assessments of entrepreneurial skill, it does not imply overconfidence. Judgmental fallibility leads to excess entry even when everyone is underconfident. Self-selection implies greater confidence (but not necessarily overconfidence) among those who start new businesses than those who do not and among successful entrants than failures. Our results question claims that “entrepreneurs are overconfident” and emphasize the need to understand the role of judgmental fallibility in producing economic outcomes.
    Keywords: Excess entry, fallible judgment, overconfidence, skill uncertainty, entrepreneurship
    JEL: D80 L26 M13
    Date: 2008–12
  2. By: Natalia Karelaia; Robin Hogarth
    Abstract: In most naturally occurring situations, success depends on both skill and chance. We compare experimental market entry decisions where payoffs depend on skill alone and combinations of skill and luck. We find more risk taking with skill and luck as opposed to skill alone, particularly for males, and little overconfidence. Our data support an explanation based on differential attitudes toward luck by those whose self-assessed skills are low and high. Making luck more important induces greater optimism for the former, while the latter maintain a belief that high levels of skill are sufficient to overcome the vagaries of chance.
    Keywords: Skill, luck, overconfidence, optimism, competition, gender differences, risk taking
    JEL: C91 D81
    Date: 2008–12
  3. By: Luis Cabral; Zhu Wang
    Abstract: We develop a “passive learning” model of firm entry by spin-off: firm employees leave their employer and create a new firm when (a) they learn they are good entrepreneurs (type I spin-offs) or (b) they learn their employer's prospects are bad (type II spin-offs). Our theory predicts a high correlation between spin-offs and parent exit, especially when the parent is a lowproductivity firm. This correlation may correspond to two types of causality: spin-off causes firm exit (type I spin-offs) and firm exit causes spin-off (type II spin-offs). We test and confirm this and other model predictions on a unique data set of the U.S. automobile industry. Finally, we discuss policy implications regarding “covenant not to compete” laws
    Date: 2008
  4. By: Ruan, Jianqing; Zhang, Xiaobo
    Abstract: "Traditional economic theory posits that a well-functioning capital market is a necessary condition for industrialization and economic growth. In reality, micro and small enterprises are ubiquitous because entrepreneurs can undertake low-return activities with minimal barriers to entry. Using a cashmere sweater cluster in China as an example, this paper shows that organizational choice can overcome the prohibitive cost of investment. When facing credit constraints, firms are more likely to concentrate in divisible production technologies in the form of industrial clusters. Within clusters, a vertically-integrated production process can be decomposed into many small incremental stages that are more accessible for the small entrepreneurs widely available in rural China, thereby supporting industrialization even in the absence of a well-functioning capital market. The observed rate of returns to capital is closely related to the organizational choice under credit constraints." from authors' abstract
    Keywords: Industrialization, Entrepreneurship, Credit, Capital markets, organizational choice, Non-farm development,
    Date: 2008
  5. By: Fumiko Hayashi; Zhu Wang
    Abstract: This paper studies product innovation and firm survival in the U.S. ATM/debit card industry. The industry started with a few shared ATM networks in the early 1970s. The number of networks grew quickly up until the mid 1980s, but then declined sharply. We construct a theoretical model based on Jovanovic and MacDonald (1994). In contrast to their model focusing on cost-saving technological innovation, our model shows a major product innovation may also trigger the shakeout. The theoretical predictions are tested using a novel dataset on network entry, exit, size, location, ownership and product choices. The findings suggest introducing the point of sale debit function in the mid 1980s played an important role driving the network consolidation. Unlike previous studies, we find little advantage of being early industry entrants. Rather, due to network effects in the industry, large networks had better chance to adopt the product innovation and survive the shakeout.
    Date: 2008
  6. By: Lenno Uusküla
    Abstract: Traditional models of monetary transmission such as sticky price and limited participation abstract from firm creation and destruction. Only a few papers look at the empirical effects of the monetary shock on the firm turnover measures. But what can we learn about monetary transmission by including measures for firm turnover into the theoretical and empirical models? Based on a large scale vector autoregressive (VAR) model for the U.S. economy I show that a contractionary monetary policy shock increases the number of business bankruptcy filings and failures, and decreases the creation of firms and net entry. According to the limited participation model, a contractionary monetary shock leads to a drop in the number of firms. On the contrary the same shock in the sticky price model increases the number of firms. Therefore the empirical findings support more the limited participation type of the monetary transmission
    Keywords: monetary transmission, limited participation, sticky prices, firm entry, firm bankruptcy, structural VAR
    JEL: E32 C32
    Date: 2009–01–02

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