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Financing Entrepreneurship and the Old-Boy Network

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Author Info

  • Inci, Eren

    ()
    (Sabanci University)

  • Parker, Simon C.

    ()
    (Western University, Canada)

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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6288.

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Length: 40 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6288

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Keywords: entrepreneurship; financiers; networks; start-up financing;

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References

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  1. 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.
  2. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  3. Scott Shane & Daniel Cable, 2002. "Network Ties, Reputation, and the Financing of New Ventures," Management Science, INFORMS, vol. 48(3), pages 364-381, March.
  4. Bergemann, Dirk & Hege, Ulrich, 1997. "Venture Capital Financing, Moral Hazard and Learning," CEPR Discussion Papers 1738, C.E.P.R. Discussion Papers.
  5. Pierre-Guillaume Méon & Khalid Sekkat, 2005. "Does corruption grease or sand the wheels of growth?," ULB Institutional Repository 2013/7364, ULB -- Universite Libre de Bruxelles.
  6. 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.
  7. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.
  8. Orzach, Ram & Tauman, Yair, 2005. "Strategic dropouts," Games and Economic Behavior, Elsevier, vol. 50(1), pages 79-88, January.
  9. 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.
  10. 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.
  11. Parker, Simon C., 2008. "The economics of formal business networks," Journal of Business Venturing, Elsevier, vol. 23(6), pages 627-640, November.
  12. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
  13. 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.
  14. Saloner, Garth, 1985. "Old Boy Networks as Screening Mechanisms," Journal of Labor Economics, University of Chicago Press, vol. 3(3), pages 255-67, July.
  15. Steven N. Kaplan & Per Stromberg, 2001. "Venture Capitalists As Principals: Contracting, Screening, and Monitoring," NBER Working Papers 8202, National Bureau of Economic Research, Inc.
  16. 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.
  17. 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.
  18. 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.
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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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