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The Old-Boy Network and the Quality of Entrepreneurs

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  • Mehmet Bac
  • Eren Inci

Abstract

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.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-06/cesifo1_wp3071.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3071.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3071

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Keywords: entrepreneur; network; start-up financing;

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  1. Calvó-Armengol, Antoni & Zenou, Yves, 2001. "Job Matching, Social Network and Word-of-Mouth Communication," CEPR Discussion Papers 2797, C.E.P.R. Discussion Papers.
  2. Wahba, Jackline & Zenou, Yves, 2005. "Density, social networks and job search methods: Theory and application to Egypt," Journal of Development Economics, Elsevier, vol. 78(2), pages 443-473, December.
  3. Parker, Simon C., 2008. "The economics of formal business networks," Journal of Business Venturing, Elsevier, vol. 23(6), pages 627-640, November.
  4. Adriana Kugler, 2002. "Employee referrals and efficiency wages," Economics Working Papers 647, Department of Economics and Business, Universitat Pompeu Fabra.
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  6. Eren Inci, 2007. "Occupational Choice and the Quality of Entrepreneurs," Boston College Working Papers in Economics 666, Boston College Department of Economics.
  7. Birley, Sue, 1985. "The role of networks in the entrepreneurial process," Journal of Business Venturing, Elsevier, vol. 1(1), pages 107-117.
  8. Fontaine, Francois, 2007. "A simple matching model with social networks," Economics Letters, Elsevier, vol. 94(3), pages 396-401, March.
  9. Antoni Calvó-Armengol & Matthew O. Jackson, 2003. "Networks in Labor Markets: Wage and Employment Dynamics and Inequality," Working Papers 55, Barcelona Graduate School of Economics.
  10. Antoni Calvó-Armengol & Matthew O. Jackson, 2004. "The Effects of Social Networks on Employment and Inequality," American Economic Review, American Economic Association, vol. 94(3), pages 426-454, June.
  11. Kono, Hisaki, 2006. "Employment with connections: Negative network effects," Journal of Development Economics, Elsevier, vol. 81(1), pages 244-258, October.
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  13. Biggs, Tyler & Shah, Manju Kedia, 2006. "African SMES, networks, and manufacturing performance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3043-3066, November.
  14. Parker,Simon C., 2004. "The Economics of Self-Employment and Entrepreneurship," Cambridge Books, Cambridge University Press, number 9780521828130, November.
  15. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  16. Inci, Eren, 2006. "Success breeds success locally: a tale of incubator firms," ZEW Discussion Papers 06-71, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  17. Simon, Curtis J & Warner, John T, 1992. "Matchmaker, Matchmaker: The Effect of Old Boy Networks on Job Match Quality, Earnings, and Tenure," Journal of Labor Economics, University of Chicago Press, vol. 10(3), pages 306-30, July.
  18. 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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  20. Bruderl, Josef & Preisendorfer, Peter, 1998. " Network Support and the Success of Newly Founded Businesses," Small Business Economics, Springer, vol. 10(3), pages 213-25, May.
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Cited by:
  1. Eren Inci, 2007. "Occupational Choice and the Quality of Entrepreneurs," Boston College Working Papers in Economics 666, Boston College Department of Economics.
  2. Eren Inci & Simon C. Parker, 2013. "Financing Entrepreneurship and the Old-Boy Network," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(2), pages 232-258, 06.

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