The Old‐Boy Network and the Quality of Entrepreneurs
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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Volume (Year): 19 (2010)
Issue (Month): 4 (December)
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