The Old-Boy Network and the Quality of Entrepreneurs

We study a model of network formation and start-up financing with endogenous entrepreneurial type distribution. A hub firm admits members to its network based on signals about entrepreneurs’ types. Network membership is observable, which allows lenders to offer different interest rates to network and stand-alone entrepreneurs. We show that a network outcome can display a smaller number of high-type entrepreneurs even though the network is neither nepotistic nor informationally disadvantaged. While a welfare-improving network can emerge as a technically stable or unstable equilibrium, one that decreases welfare is always formed by a technically unstable equilibrium. However, the adverse welfare effects of a network and its corresponding type configuration may persist because ex-post high type entrepreneurs prefer to stay high type whereas those who wish to become high-type may need some time to react.

[1]  Michael Melvin,et al.  Active Currency Investing and PerformanceBenchmarks , 2011, The Journal of Portfolio Management.

[2]  Harry J. Holzer,et al.  Search Method Use by Unemployed Youth , 1986, Journal of Labor Economics.

[3]  Kenneth L. Sokoloff,et al.  Financing innovation in the United States, 1870 to the present , 2007 .

[4]  B. Heer,et al.  A Note on the Computation of the Equity Premium and the Market Value of Firm Equity , 2010, SSRN Electronic Journal.

[5]  G. Caporale,et al.  Time‐Varying Spot and Futures Oil Price Dynamics , 2010, SSRN Electronic Journal.

[6]  Lasse Steiner,et al.  Pay as you go: a new proposal for museum pricing , 2010, SSRN Electronic Journal.

[7]  J. Brüderl,et al.  Network Support and the Success of Newly Founded Business , 1998 .

[8]  M. Jackson,et al.  The Effects of Social Networks on Employment and Inequality , 2004 .

[9]  Dennis L. Gärtner,et al.  Making Sense of Non-Binding Retail-Price Recommendations , 2009, SSRN Electronic Journal.

[10]  J. Ligthart,et al.  Has the Euro Affected the Choice of Invoicing Currency? , 2010, SSRN Electronic Journal.

[11]  Laurence Jacquet.  Take It or Leave It: Take-Up, Optimal Transfer Programs, and Monitoring , 2010, SSRN Electronic Journal.

[12]  H. Bohn,et al.  Population Under a Cap on Greenhouse Gas Emissions , 2010 .

[13]  Frederick van der Ploeg,et al.  Aggressive Oil Extraction and Precautionary Saving: Coping with Volatility , 2010, SSRN Electronic Journal.

[14]  Garth Saloner,et al.  Old Boy Networks as Screening Mechanisms , 1985, Journal of Labor Economics.

[15]  H̊akan Selin.  Marginal Tax Rates and Tax‐Favoured Pension Savings of the Self‐Employed: Evidence from Sweden , 2010 .

[16]  Toke S. Aidt,et al.  Fiscal Federalism and Electoral Accountability , 2010, SSRN Electronic Journal.

[17]  K. O. Aarbu.  Demand Patterns for Treatment Insurance in Norway , 2010, SSRN Electronic Journal.

[18]  X. Vives.  Competition and Stability in Banking , 2010, SSRN Electronic Journal.

[19]  Silvia Rocha-Akis,et al.  Welfare Policy in the Presence of Unionised Labour and Internationally Mobile Firms , 2010, SSRN Electronic Journal.

[20]  S. Birley.  The Role of Networks in the Entrepreneurial Process , 1985 .

[21]  S. Parker.  Asymmetric Information, Occupational Choice and Government Policy , 2003 .

[22]  Curtis J. Simon,et al.  Matchmaker, Matchmaker: The Effect of Old Boy Networks on Job Match Quality, Earnings, and Tenure , 1992, Journal of Labor Economics.

[23]  Curtis R. Taylor.  The Old‐Boy Network and the Young‐Gun Effect , 2000 .

[24]  M. Wrede.  Multinational Capital Structure and Tax Competition , 2010, SSRN Electronic Journal.

[25]  Robert N. McCauley,et al.  Renminbising China'S Foreign Assets , 2010, SSRN Electronic Journal.

[26]  Matthew O. Jackson,et al.  Networks in labor markets: Wage and employment dynamics and inequality , 2007, J. Econ. Theory.

[27]  Gunther Markwardt,et al.  Decentralization and Foreign Aid Effectiveness: Do Aid Modality and Federal Design Matter in Poverty Alleviation? , 2010, SSRN Electronic Journal.

[28]  B. Uzzi,et al.  Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing , 1999, The New Economic Sociology.

[29]  Balázs Égert,et al.  Exports and Property Prices in France: Are They Connected? , 2010, SSRN Electronic Journal.

[30]  Howard E. Aldrich,et al.  Entrepreneurship Through Social Networks , 1986 .

[31]  Andrey Launov,et al.  Estimating Incentive and Welfare Effects of Nonstationary Unemployment Benefits , 2010, SSRN Electronic Journal.

[32]  Yannis M. Ioannides,et al.  Job Information Networks, Neighborhood Effects, and Inequality , 2004 .

[33]  S. Parker.  The economics of formal business networks , 2008 .

[34]  D. Bank.  THE PUNGENT SMELL OF “ RED HERRINGS ” : Subsoil assets , rents , volatility and the resource curse , 2009 .

[35]  R. MacDonald,et al.  A Panel Data Investigation of Real Exchange Rate Misalignment and Growth , 2010, SSRN Electronic Journal.

[36]  R. Hartley,et al.  A New Approach to Solving Production-Appropriation Games with Many Heterogeneous Players , 2010, SSRN Electronic Journal.

[37]  M. Beine,et al.  Migration and Networks: Does Education Matter More than Gender? , 2010, SSRN Electronic Journal.

[38]  Eren Inci.  Occupational Choice and the Quality of Entrepreneurs , 2007 .

[39]  J. Montgomery.  Social Networks and Labor-Market Outcomes: Toward an Economic Analysis , 1991 .

[40]  P. Cahuc,et al.  On the Efficiency of Job Search with Social Networks , 2002, SSRN Electronic Journal.

[41]  C. Teulings,et al.  Is Economic Recovery a Myth? Robust Estimation of Impulse Responses , 2010, SSRN Electronic Journal.

[42]  S. Parker.  The Economics of Self-Employment and Entrepreneurship , 2004 .

[43]  Eren Inci.  Success Breeds Success Locally: A Tale of Incubator Firms , 2008 .

[44]  O. Edenhofer,et al.  Prices vs. Quantities and the Intertemporal Dynamics of the Climate Rent , 2010, SSRN Electronic Journal.

[45]  Kaivan Munshi.  Networks in the Modern Economy: Mexican Migrants in the U. S. Labor Market , 2003 .

[46]  R. Selten,et al.  A Generalized Nash Solution for Two-Person Bargaining Games with Incomplete Information , 1972 .

[47]  Laurent Simula,et al.  Marginal Deadweight Loss When the Income Tax is Nonlinear , 2010, Journal of Econometrics.

[48]  T. Andersen.  Why Do Scandinavians Work? , 2010 .

[49]  Justin Wolfers,et al.  Nber Working Paper Series Explaining the Favorite-longshot Bias: Is It Risk-love or Misperceptions? , 2022 .

[50]  Clara Graziano,et al.  Optimal Delegation when the Large Shareholder has Multiple Tasks , 2010, SSRN Electronic Journal.

[51]  Lukas Menkhoff,et al.  Limit-Order Submission Strategies under Asymmetric Information , 2010, SSRN Electronic Journal.

[52]  J. Wrona,et al.  Offshoring Tasks, Yet Creating Jobs? , 2010, SSRN Electronic Journal.

[53]  J. Sobel,et al.  STRATEGIC INFORMATION TRANSMISSION , 1982 .

[54]  David N. Laband,et al.  Why So Many Children of Doctors Become Doctors: Nepotism vs. Human Capital Transfers , 1989 .

[55]  Leonid V. Azarnert.  Après nous le Déluge: fertility and the intensity of struggle against immigration , 2010, SSRN Electronic Journal.

[56]  Jukka Pirttila,et al.  The Employment Effects of Low-Wage Subsidies , 2010, SSRN Electronic Journal.

[57]  Adriana Kugler.  Employee Referrals and Efficiency Wages , 2002, SSRN Electronic Journal.

[58]  Paola Rossi,et al.  Credit constraints in Italian industrial districts , 2001 .

[59]  Mark S. Granovetter.  Getting a Job: A Study of Contacts and Careers , 1974 .

[60]  F. Fontaine.  A simple matching model with social networks , 2007 .

[61]  Doina Radulescu.  The Effects of a Bonus Tax on Manager Compensation and Welfare , 2010, SSRN Electronic Journal.

[62]  Jan Tuinstra,et al.  Identification of Voters with Interest Groups Improves the Electoral Chances of the Challenger , 2010, Math. Soc. Sci..

[63]  Hisaki Kono.  Employment with connections: Negative network effects , 2006 .

[64]  David Z. YankelevskyU,et al.  Personal and extended networks are central to the entrepreneurial process , 2012 .

[65]  Johannes Becker,et al.  Strategic Trade Policy Through the Tax System , 2010, SSRN Electronic Journal.

[66]  T. Eichner,et al.  Tax-Competition with Involuntary Unemployment , 2010, SSRN Electronic Journal.

[67]  Ruslan Lukach,et al.  The Patterns of Inter-Firm and Inter-Industry Knowledge Flows in the Netherlands , 2010, SSRN Electronic Journal.

[68]  Tyler Biggs,et al.  African SMES, networks, and manufacturing performance , 2006 .

[69]  T. Eichner,et al.  Efficient Management of Insecure Fossil Fuel Imports Through Taxing (!) Domestic Green Energy? , 2010, SSRN Electronic Journal.

[70]  B. Uzzi,et al.  The Sources and Consequences of Embeddedness for the Economic Performance of Organizations: The Network Effect , 1996 .

[71]  Oskar Kowalewski,et al.  Why do Foreign Banks Withdraw from Other Countries? A Panel Data Analysis , 2010, SSRN Electronic Journal.

[72]  W. Greene,et al.  Do Undergraduate Majors or Ph.D. Students Affect Faculty Size? , 2010, SSRN Electronic Journal.

[73]  David C. Webb,et al.  Too Much Investment: A Problem of Asymmetric Information , 1987 .

[74]  D. Novy.  International Trade and Monopolistic Competition Without CES: Estimating Translog Gravity , 2010, SSRN Electronic Journal.

[75]  Dale T. Mortensen,et al.  Personal contacts and earnings , 1994 .

[76]  M. Petersen,et al.  The Benefits of Lending Relationships: Evidence from Small Business Data , 1994 .

[77]  Brian Uzzi,et al.  Relational Embeddedness and Learning: The Case of Bank Loan Managers and Their Clients , 2003, Manag. Sci..

[78]  I. Wooton,et al.  A race beyond the bottom: the nature of bidding for a firm , 2010, SSRN Electronic Journal.

[79]  Ainura Uzagalieva,et al.  Technological Imitation and Innovation in New European Union Markets , 2010, SSRN Electronic Journal.

[80]  Yves Zenou,et al.  Job Matching, Social Network and Word-of-Mouth Communication , 2001, SSRN Electronic Journal.

[81]  T. Aronsson,et al.  Redistributive Income Taxation under Outsourcing and Foreign Direct Investment , 2010, SSRN Electronic Journal.

[82]  Yves Zenou,et al.  Density, Social Networks and Job Search Methods: Theory and Application to Egypt , 2003 .

[83]  Filip Zikes,et al.  Volatility Transmission in Emerging European Foreign Exchange Markets , 2010, SSRN Electronic Journal.

[84]  Dale T. Mortensen,et al.  Personal contacts and earnings: It is who you know!☆ , 1995 .

[85]  Conny Wunsch,et al.  Evaluating Nationwide Health Interventions When Standard Before-After DoesnﾒT Work: Malawi's Itn Distribution Program , 2010, SSRN Electronic Journal.