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Bifurcations in business profitability: An agent-based simulation of homophily in self-financing groups

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  • Gonzales Martinez, Rolando
  • D’Espallier, Bert
  • Mersland, Roy

Abstract

Formal financial institutions inadequately distribute startup capital to business ventures of ethnic minorities, women, low-educated, and young people. Self-financing groups fill this gap because in these associations agents accumulate their savings into a fund that is later used to provide loans to the members. This study builds and simulates an agent-based model that compares the profitability of businesses started by members of self-financing groups against businesses financed by commercial loans. The results indicate that - besides the self-generation of debt capital - businesses of members of self-financing groups can have higher returns due to the consolidation of social capital and the competitive advantage created through a dual process of homophily. Higher quotas of savings boost profits, but only up to a threshold, after which a bifurcation pattern - typical of complexity dynamics - emerges. The practical and theoretical implications of the findings are discussed and future research lines are proposed.

Suggested Citation

  • Gonzales Martinez, Rolando & D’Espallier, Bert & Mersland, Roy, 2021. "Bifurcations in business profitability: An agent-based simulation of homophily in self-financing groups," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 129, pages 495-514.
    • Handle: RePEc:zbw:espost:328369
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