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Financing Entrepreneurship and the Old-Boy Network

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  • Eren Inci
  • Simon C. Parker

Abstract

We study entrepreneurs' start-up financing from banks and local financiers. An informal network, whose membership cannot be observed by outsiders, conveys the good signals it gets about the hidden types of network entrepreneurs to local financiers, which are then reflected in different loan terms. We show that there are winners and losers as a result of the network even among its members. Because all projects have positive net value, it is efficient to finance them even in the absence of a network. Thus, the formation of the network is inefficient as entrepreneurs incur networking costs for purely redistributive gains in the form of better loan terms as network members.

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File URL: http://hdl.handle.net/10.1111/10.1111/gems.2013.22.issue-2
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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 22 (2013)
Issue (Month): 2 (06)
Pages: 232-258

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Handle: RePEc:bla:jemstr:v:22:y:2013:i:2:p:232-258

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References

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  1. Yannis M. Ioannides & Linda Datcher Loury, 2004. "Job Information Networks, Neighborhood Effects, and Inequality," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1056-1093, December.
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  7. Taylor, Curtis R, 2000. "The Old-Boy Network and the Young-Gun Effect," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(4), pages 871-91, November.
  8. Bergemann, D. & Hege, U., 1997. "Venture Capital Financing, Moral Hazard and Learning," Discussion Paper 1997-108, Tilburg University, Center for Economic Research.
  9. Nofsinger, John R. & Wang, Weicheng, 2011. "Determinants of start-up firm external financing worldwide," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2282-2294, September.
  10. Mehmet Bac & Eren Inci, 2010. "The Old‐Boy Network and the Quality of Entrepreneurs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(4), pages 889-918, December.
  11. Ramana Nanda & Tarun Khanna, 2010. "Diasporas and Domestic Entrepreneurs: Evidence from the Indian Software Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(4), pages 991-1012, December.
  12. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.
  13. Naomi R. Lamoreaux & Kenneth L. Sokoloff (ed.), 2007. "Financing Innovation in the United States, 1870 to Present," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262122898, December.
  14. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc.
  15. Scott Shane & Daniel Cable, 2002. "Network Ties, Reputation, and the Financing of New Ventures," Management Science, INFORMS, vol. 48(3), pages 364-381, March.
  16. Saloner, Garth, 1985. "Old Boy Networks as Screening Mechanisms," Journal of Labor Economics, University of Chicago Press, vol. 3(3), pages 255-67, July.
  17. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
  18. Orzach, Ram & Tauman, Yair, 2005. "Strategic dropouts," Games and Economic Behavior, Elsevier, vol. 50(1), pages 79-88, January.
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Cited by:
  1. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.

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