IDEAS home Printed from https://ideas.repec.org/p/ags/uwarer/269594.html
   My bibliography  Save this paper

Survival of the Small Firm and the Entrepreneur under Demand and Effciency Uncertainty

Author

Listed:
  • Flores-Romero, Manuel G.

Abstract

The objective of this paper is to o¤er an answer to the question: why do some entrepreneurs wish to own another …rm in the future after having closed an unsuccessful one? We …rst show this question is relevant because making use of a sample of entrepreneurs in the UK who have experienced a business closure, we show that 45% of them have the desire to own another …rm in the future, despite having an unsuccessful experience in small …rm ownership. To tackle our question we develop a model where the pro…ts of the small …rm depend on two …rm-speci…c parameters: the e¢ciency parameter, which represents the skills of the entrepreneur to manage and cope e¢ciently with the everyday tasks of the small …rm, and the demand parameter, which denotes the success of the …rm’s product to attract demand or capture a market niche. It is found that our model answers our initial question by revealing the existence of a mechanism of entrepreneurial self-selection. Under such mechanism, skilful entrepreneurs are the only ones who wish to own another …rm in the future, regardless of the degree of success in their previous venture, whereas unskilful entrepreneurs prefer to go to wage work. We show this mechanism accounts not only for the empirical evidence relevant to our initial question, but also for the rest of cases of entrepreneurs’ attitudes after experiencing a business closure.

Suggested Citation

  • Flores-Romero, Manuel G., 2004. "Survival of the Small Firm and the Entrepreneur under Demand and Effciency Uncertainty," Economic Research Papers 269594, University of Warwick - Department of Economics.
    • Handle: RePEc:ags:uwarer:269594
    DOI: 10.22004/ag.econ.269594
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/269594/files/twerp700.pdf
    Download Restriction: no
    File URL: https://ageconsearch.umn.edu/record/269594/files/twerp700.pdf?subformat=pdfa
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.269594?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Mata, Jose & Portugal, Pedro, 1994. "Life Duration of New Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 42(3), pages 227-245, September.
    2. Fuente,Angel de la, 2000. "Mathematical Methods and Models for Economists," Cambridge Books, Cambridge University Press, number 9780521585293.
    3. Hart, Oliver D, 1985. "Monopolistic Competition in the Spirit of Chamberlin: Special Results," Economic Journal, Royal Economic Society, vol. 95(380), pages 889-908, December.
    4. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
    5. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-827, August.
    6. Blanchflower, David G & Oswald, Andrew J, 1998. "What Makes an Entrepreneur?," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 26-60, January.
    7. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    8. Cressy, Robert, 1996. "Are Business Startups Debt-Rationed?," Economic Journal, Royal Economic Society, vol. 106(438), pages 1253-1270, September.
    9. Evan J. Douglas & Dean A. Shepherd, 2002. "Self-Employment as a Career Choice: Attitudes, Entrepreneurial Intentions, and Utility Maximization," Entrepreneurship Theory and Practice, , vol. 26(3), pages 81-90, April.
    10. White, Lawrence J, 1982. "The Determinants of the Relative Importance of Small Business," The Review of Economics and Statistics, MIT Press, vol. 64(1), pages 42-49, February.
    11. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
    12. Anh T. Le, 1999. "Empirical Studies of Self‐Employment," Journal of Economic Surveys, Wiley Blackwell, vol. 13(4), pages 381-416, September.
    13. Taylor, Mark P, 2001. "Self-Employment and Windfall Gains in Britain: Evidence from Panel Data," Economica, London School of Economics and Political Science, vol. 68(272), pages 539-565, November.
    14. Oliver D. Hart, 1985. "Monopolistic Competition in the Spirit of Chamberlin: A General Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(4), pages 529-546.
    15. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    16. Bates, Timothy, 1990. "Entrepreneur Human Capital Inputs and Small Business Longevity," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 551-559, November.
    17. Holmes, Thomas J & Schmitz, James A, Jr, 1990. "A Theory of Entrepreneurship and Its Application to the Study of Business Transfers," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 265-294, April.
    18. Tyson, Laura d'Andrea & Petrin, Tea & Rogers, F Halsey, 1994. "Promoting Entrepreneurship in Eastern Europe," Small Business Economics, Springer, vol. 6(3), pages 165-184, June.
    19. Gladstone, Bryan & Lee, Jennifer Lane, 1995. "The Operation of the Insolvency System in the U.K.: Some Implications for Entrepreneurialism," Small Business Economics, Springer, vol. 7(1), pages 55-66, February.
    20. Agarwal, Rajshree & Gort, Michael, 1996. "The Evolution of Markets and Entry, Exit and Survival of Firms," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 489-498, August.
    21. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-535, June.
    22. De Fraja, Gianni, 1996. "Entrepreneur or Manager: Who Runs the Firm?," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 89-98, March.
    23. Agarwal, Rajshree & Audretsch, David B., 1999. "The two views of small firms in industry dynamics: a reconciliation," Economics Letters, Elsevier, vol. 62(2), pages 245-251, February.
    24. David B. Audretsch, 1995. "Innovation and Industry Evolution," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262011468, December.
    25. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    26. Geroski, P. A., 1995. "What do we know about entry?," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 421-440, December.
    27. Murray Z. Frank, 1988. "An Intertemporal Model of Industrial Exit," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(2), pages 333-344.
    28. Douglas, Evan J. & Shepherd, Dean A., 2000. "Entrepreneurship as a utility maximizing response," Journal of Business Venturing, Elsevier, vol. 15(3), pages 231-251, May.
    29. Audretsch,David B. & Thurik,Roy (ed.), 1999. "Innovation, Industry Evolution and Employment," Cambridge Books, Cambridge University Press, number 9780521641661.
    30. Blanchflower, David G & Meyer, Bruce D, 1994. "A Longitudinal Analysis of the Young Self-Employed in Australia and the United States," Small Business Economics, Springer, vol. 6(1), pages 1-19, February.
    31. Rajshree Agarwal & David B. Audretsch, 2001. "Does Entry Size Matter? The Impact of the Life Cycle and Technology on Firm Survival," Journal of Industrial Economics, Wiley Blackwell, vol. 49(1), pages 21-43, March.
    32. Audretsch, David B, 1991. "New-Firm Survival and the Technological Regime," The Review of Economics and Statistics, MIT Press, vol. 73(3), pages 441-450, August.
    33. C. M. Van Praag & J. S. Cramer, 2001. "The Roots of Entrepreneurship and Labour Demand: Individual Ability and Low Risk Aversion," Economica, London School of Economics and Political Science, vol. 68(269), pages 45-62, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Flores-Romero, Manuel G, 2004. "Survival Of The Small Firm And The Entrepreneur Under Demand And Efficiency Uncertainty," The Warwick Economics Research Paper Series (TWERPS) 700, University of Warwick, Department of Economics.
    2. Marco Vivarelli, 2013. "Is entrepreneurship necessarily good? Microeconomic evidence from developed and developing countries," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 22(6), pages 1453-1495, December.
    3. Enrico Santarelli & Marco Vivarelli, 2007. "Entrepreneurship and the process of firms’ entry, survival and growth," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 16(3), pages 455-488, June.
    4. Colombo, Massimo G. & Delmastro, Marco & Grilli, Luca, 2004. "Entrepreneurs' human capital and the start-up size of new technology-based firms," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1183-1211, November.
    5. Vivarelli, Marco, 2012. "Drivers of entrepreneurship and post-entry performance : microeconomic evidence from advanced and developing countries," Policy Research Working Paper Series 6245, The World Bank.
    6. Vivarelli, Marco, 2012. "Entrepreneurship in Advanced and Developing Countries: A Microeconomic Perspective," IZA Discussion Papers 6513, Institute of Labor Economics (IZA).
    7. Harald Strotmann, 2007. "Entrepreneurial Survival," Small Business Economics, Springer, vol. 28(1), pages 87-104, January.
    8. Blumberg, Boris F. & Pfann, Gerard A., 2015. "Roads Leading to Self-Employment: Comparing Transgenerational Entrepreneurs and Self-Made Start-Ups," IZA Discussion Papers 9155, Institute of Labor Economics (IZA).
    9. Isabel Grilo & Jesus Maria Irigoyen, 2005. "Entrepreneurship in the EU: to wish and not to be," Papers on Entrepreneurship, Growth and Public Policy 2005-01, Max Planck Institute of Economics, Entrepreneurship, Growth and Public Policy Group.
    10. Jose Plehn-Dujowich, 2010. "A theory of serial entrepreneurship," Small Business Economics, Springer, vol. 35(4), pages 377-398, November.
    11. Harald Strotmann, 2002. "Determinanten des Überlebens von Neugründungen in der badenwürttembergischen Industrie. Eine empirische Survivalanalyse mit amtlichen Betriebsdaten," IAW Discussion Papers 06, Institut für Angewandte Wirtschaftsforschung (IAW).
    12. Niklas Elert, 2014. "What determines entry? Evidence from Sweden," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 53(1), pages 55-92, August.
    13. Nadia Simoes & Nuno Crespo & Sandrina B. Moreira, 2016. "Individual Determinants Of Self-Employment Entry: What Do We Really Know?," Journal of Economic Surveys, Wiley Blackwell, vol. 30(4), pages 783-806, September.
    14. Prantl, Susanne, 2003. "Bankruptcy and Voluntary Liquidation: Evidence for New Firms in East and West Germany after Unification," ZEW Discussion Papers 03-72, ZEW - Leibniz Centre for European Economic Research.
    15. Ashish Arora & Anand Nandkumar, 2011. "Cash-Out or Flameout! Opportunity Cost and Entrepreneurial Strategy: Theory, and Evidence from the Information Security Industry," Management Science, INFORMS, vol. 57(10), pages 1844-1860, October.
    16. Robert W. Fairlie & Alicia M. Robb, 2008. "Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States," MIT Press Books, The MIT Press, edition 1, volume 1, number 026206281x, December.
    17. Isabel Grilo & Roy Thurik, 2008. "Determinants of entrepreneurial engagement levels in Europe and the US," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 17(6), pages 1113-1145, December.
    18. Erik Stam & Roy Thurik & Peter van der Zwan, 2010. "Entrepreneurial exit in real and imagined markets," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 19(4), pages 1109-1139, August.
    19. Sarah Brown & Lisa Farrell & Mark N. Harris & John G. Sessions, 2006. "Risk preference and employment contract type," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 169(4), pages 849-863, October.
    20. Jean Gabszewicz & Didier Laussel, 2007. "Increasing returns, entrepreneurship and imperfect competition," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(1), pages 1-19, January.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:uwarer:269594. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.