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The role of individual financial contributions in the formation of entrepreneurial teams

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  • Vereshchagina, Galina

Abstract

This paper studies how entrepreneurs, limited in how much they are able to contribute to a joint business, organize in partnerships, and how this process is impacted by the frictions common for team production. It demonstrates that moral hazard and reliance on simple equity sharing contracts create incentives for the entrepreneurs making large contributions to team up together, even if the production technology exhibits decreasing returns to scale to total investment. The paper formalizes this novel mechanism in a matching model and illustrates that the model’s predictions regarding co-owners’ financial contributions and ownership shares are consistent with the empirical evidence from the Kauffman Firm Survey data.

Suggested Citation

  • Vereshchagina, Galina, 2019. "The role of individual financial contributions in the formation of entrepreneurial teams," European Economic Review, Elsevier, vol. 113(C), pages 173-193.
    • Handle: RePEc:eee:eecrev:v:113:y:2019:i:c:p:173-193
    DOI: 10.1016/j.euroecorev.2019.01.005
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    More about this item

    Keywords

    Entrepreneurship; Team production; Assortative matching; Partnerships; Moral hazard; Equity sharing; Borrowing constraints;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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