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Start-up Entry Strategies: Employer vs. Nonemployer firms

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  • Michele Moretto

    (University of Brescia)

  • Gianpaolo Rossini

    (University of Bologna)

Abstract

From 1997 to 2001 we observe in the Usa a faster growth in the number of Nonemployer firms (NF) vis à vis Employer firms (EF). The diverse speed of net entry may be due to particular internal organisation of the two types of firms and the effect that this has on the reactions to market uncertainty. However, the set of internal organizations of firms is larger than that made up simply by EFs and NFs, in particular among newborn firms, since we observe corporate start-ups with employees, firms owned and managed by their founders who are simultaneously the employees and, finally, non corporate enterprises. The second class of firms mostly belongs to the category of NFs, according to US nomenclature, while non corporate firms may belong to either category. Our curiosity is attracted by different entry patterns of NFs and EFs and our aim is to interpret them. According to recent literature, firms carry out an irreversible investment, such as entry, only if market prices are strictly larger than average total costs (Marshallian point). However, the trigger price that makes firms become active is affected by institutional rules, the existence of profit sharing, efficiency wages, exit options - i.e. partial reversibility -, financial constraints. Then, the internal organization of a newborn firm may make the difference. In a continuous time stochastic environment, where firms bear a sunk cost, we model entry as a growth option. On the trace of distinct objective functions we show that NFs and EFs have specific entry patterns in terms of output price and/or size. Why? Simply because they react in diverse fashions to market price volatility. In this sense we are able to show that, in most cases, the NF is locally less risky. This makes the NF better suited to enter under conditions of higher volatility. This exactly corresponds to what happened during the years between 1997-2001.

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Bibliographic Info

Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2005.13.

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Date of creation: Jan 2005
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Handle: RePEc:fem:femwpa:2005.13

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Keywords: Entry strategies; Uncertainty; Nonemployer; Employer firms;

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  1. Leahy, J.V., 1991. "The Optimality of Myopic Behaviour in a Competitive Model of Entry and Exit," Harvard Institute of Economic Research Working Papers 1566, Harvard - Institute of Economic Research.
  2. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
  3. Pestieau, P. & Thisse, J. -F., 1979. "On market imperfections and labor management," Economics Letters, Elsevier, vol. 3(4), pages 353-356.
  4. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
  5. Michele Moretto, 1999. "Optimal Capacity Adjustment by a Multiplant Firm," Working Papers 1999.28, Fondazione Eni Enrico Mattei.
  6. Sertel, Murat R., 1991. "Workers' enterprises in imperfect competition," Journal of Comparative Economics, Elsevier, vol. 15(4), pages 698-710, December.
  7. Taylor, Mark P, 1999. "Survival of the Fittest? An Analysis of Self-Employment Duration in Britain," Economic Journal, Royal Economic Society, vol. 109(454), pages C140-55, March.
  8. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  9. Simon C. Parker & Yacine Belghitar & Tim Barmby, 2005. "Wage Uncertainty and the Labour Supply of Self-Employed Workers," Economic Journal, Royal Economic Society, vol. 115(502), pages C190-C207, 03.
  10. Pencavel, John & Craig, Ben, 1994. "The Empirical Performance of Orthodox Models of the Firm: Conventional Firms and Worker Cooperatives," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 718-44, August.
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Cited by:
  1. Michele Moretto & Gianpaolo Rossini, 2007. "Are Workers. Enterprises Entry Policies Conventional," Working Papers 2007.31, Fondazione Eni Enrico Mattei.

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