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Entrepreneurial Risk and Market Entry

Author

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  • Brian Wu

    () (The Wharton School, University of Pennsylvania, 2000 SH-DH, 3620 Locust Walk, Philadelphia, Pennsylvania 19104)

  • Anne Marie Knott

    () (Olin School of Business, Washington University, Campus Box 1133, One Brookings Drive, St. Louis, Missouri 63130-4899)

Abstract

This paper attempts to reconcile the risk-bearing characterization of entrepreneurs with the stylized fact that entrepreneurs exhibit conventional risk-aversion profiles. We propose that the disparity arises from confounding two distinct dimensions of uncertainty: demand uncertainty and ability uncertainty. We further propose that entrepreneurs will be risk averse with respect to demand uncertainty, yet "apparent risk seeking" (or overconfident) with respect to ability uncertainty. To examine this view, we construct a reduced-form model of the entrepreneur's entry decision, which we aggregate to the market level, then test empirically. We find that entrepreneurs in aggregate behave as we predict. Accordingly, risk-averse entrepreneurs are willing to bear market risk when the degree of ability uncertainty is comparable to the degree of demand uncertainty. Potential market failures exist in instances where there is a high demand uncertainty but low performance dispersion (insufficient entry), or low demand uncertainty but high performance dispersion (excess entry).

Suggested Citation

  • Brian Wu & Anne Marie Knott, 2006. "Entrepreneurial Risk and Market Entry," Management Science, INFORMS, vol. 52(9), pages 1315-1330, September.
  • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:9:p:1315-1330
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    File URL: http://dx.doi.org/10.1287/mnsc.1050.0543
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Richard Arend, 2014. "Social and Environmental Performance at SMEs: Considering Motivations, Capabilities, and Instrumentalism," Journal of Business Ethics, Springer, pages 541-561.
    2. Koellinger, Philipp & Minniti, Maria & Schade, Christian, 2007. ""I think I can, I think I can": Overconfidence and entrepreneurial behavior," Journal of Economic Psychology, Elsevier, vol. 28(4), pages 502-527, August.
    3. Newman, Andrew F., 2007. "Risk-bearing and entrepreneurship," Journal of Economic Theory, Elsevier, vol. 137(1), pages 11-26, November.
    4. Hainz, Christa, 2007. "The Effect of Bank Competition on the Bank's Incentive to Collateralize," Discussion Papers in Economics 2007, University of Munich, Department of Economics.
    5. Francesco Bogliacino & Iván González-Gallo, 2015. "Aspirations, Prospect Theory and entrepreneurship: evidence from Colombia," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 62(3), pages 271-290, September.
    6. Grieco, Daniela & Hogarth, Robin M., 2009. "Overconfidence in absolute and relative performance: The regression hypothesis and Bayesian updating," Journal of Economic Psychology, Elsevier, vol. 30(5), pages 756-771, October.
    7. Rietveld, C.A. & Groenen, P.J.F. & Koellinger, Ph.D. & van der Loos, M.J.H.M. & Thurik, A.R., 2013. "Living Forever: Entrepreneurial Overconfidence at Older Ages," ERIM Report Series Research in Management ERS-2013-012-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    8. Oliver Falck & Stephan Heblich & Elke Lüdemann, 2009. "Identity and Entrepreneurship," CESifo Working Paper Series 2661, CESifo Group Munich.
    9. repec:cmj:journl:y:2012:i:26:trofinm is not listed on IDEAS
    10. Hvide, Hans K. & Panos, Georgios A., 2014. "Risk tolerance and entrepreneurship," Journal of Financial Economics, Elsevier, vol. 111(1), pages 200-223.
    11. Wennberg, Karl & Delmar, Frédéric & McKelvie, Alexander, 2016. "Variable risk preferences in new firm growth and survival," Journal of Business Venturing, Elsevier, vol. 31(4), pages 408-427.
    12. Ruta Aidis & Tomasz Mickiewicz* & Arnis Sauka, 2008. "Why Are Optimistic Entrepreneurs Successful? An Application Of The Regulatory Focus Theory," William Davidson Institute Working Papers Series wp914, William Davidson Institute at the University of Michigan.
    13. Maria Irina TROFIN, 2012. "Romanian Entrepreneurship In European Context: Origins And Future," CrossCultural Management Journal, Fundația Română pentru Inteligența Afacerii, Editorial Department, issue 2, pages 29-38, November.
    14. Benjamin A. Campbell, 2013. "Earnings Effects of Entrepreneurial Experience: Evidence from the Semiconductor Industry," Management Science, INFORMS, pages 286-304.
    15. Joohee Kim & Yonghwi Noh, 2016. "The effects of psychological capital and risk tolerance on service workers’ internal motivation for firm performance and entrepreneurship," International Entrepreneurship and Management Journal, Springer, vol. 12(3), pages 681-696, September.
    16. William Gartner & Jianwen Liao, 2012. "The effects of perceptions of risk, environmental uncertainty, and growth aspirations on new venture creation success," Small Business Economics, Springer, vol. 39(3), pages 703-712, October.
    17. Oliver Falck & Stephan Heblich & Elke Luedemann, 2012. "Identity and entrepreneurship: do school peers shape entrepreneurial intentions?," Small Business Economics, Springer, pages 39-59.
    18. McKelvie, Alexander & Haynie, J. Michael & Gustavsson, Veronica, 2011. "Unpacking the uncertainty construct: Implications for entrepreneurial action," Journal of Business Venturing, Elsevier, vol. 26(3), pages 273-292, May.
    19. Thomas Åstebro & José Mata & Luís Santos-Pinto, 2015. "Skewness seeking: risk loving, optimism or overweighting of small probabilities?," Theory and Decision, Springer, pages 189-208.
    20. Angela A. Stanton & Isabell M. Welpe, 2010. "Risk and Ambiguity: Entrepreneurial Research from the Perspective of Economics," Chapters,in: Neuroeconomics and the Firm, chapter 2 Edward Elgar Publishing.
    21. Kameliia Petrova, 2012. "Part-time entrepreneurship and financial constraints: evidence from the Panel Study of Entrepreneurial Dynamics," Small Business Economics, Springer, vol. 39(2), pages 473-493, September.
    22. van Praag, Mirjam C. & van Witteloostuijn, Arjen & van der Sluis, Justin, 2009. "Returns for Entrepreneurs vs. Employees: The Effect of Education and Personal Control on the Relative Performance of Entrepreneurs vs. Wage Employees," IZA Discussion Papers 4628, Institute for the Study of Labor (IZA).
    23. Robin Hogarth & Natalia Karelaia, 2008. "Entrepreneurial success and failure: Confidence and fallible judgement," Economics Working Papers 1130, Department of Economics and Business, Universitat Pompeu Fabra.

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    Keywords

    entry; risk; entrepreneur; uncertainty; overconfidence;

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