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Spin-offs of Entrepreneurial Firms : an O-Ring Approach The O-Ring theory provides a framework to analyse the emergence of firms organized as partnerships. The owner-managers of such entrepreneurial firms can benefit from ability matching within their production teams. However, they must also bear the project risk. Risk-aversion then induces a second-best solution. At the same time, integrated firms managed on behalf of risk-neutral residual-claimants face information and/or enforcement problems. Hence, they cannot organize ability-matched teams. It is shown that there exists an equilibrium such that groups of individuals sharing a superior ability level will found entrepreneurial firms. Low-quality individuals will be employed by managed firms which hire randomly. The paper constitutes a significantly revised version of the study formerly entitled "The Emergence of a New Economy: An O-Ring Approach", Department of Economics, University of Konstanz, Discussion Paper Series I - 314


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  • Oliver Fabel

    (Department of Economics, University of Konstanz)


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Paper provided by Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim in its series Working Papers of the Research Group Heterogenous Labor with number 03-03.

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Length: 29 pages
Date of creation: 19 May 2003
Date of revision:
Handle: RePEc:knz:hetero:0303

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Keywords: O-Ring Theory ; Ability Matching ; Entrepreneurial Firms ; Managed Firms;

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