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Start-up Entry Strategies: Employer vs. Nonemployer firms

Author

Listed:
  • Michele Moretto

    (University of Brescia)

  • Gianpaolo Rossini

    (University of Bologna)

Abstract

From 1997 to 2001 we observe in the Usa a faster growth in the number of Nonemployer firms (NF) vis à vis Employer firms (EF). The diverse speed of net entry may be due to particular internal organisation of the two types of firms and the effect that this has on the reactions to market uncertainty. However, the set of internal organizations of firms is larger than that made up simply by EFs and NFs, in particular among newborn firms, since we observe corporate start-ups with employees, firms owned and managed by their founders who are simultaneously the employees and, finally, non corporate enterprises. The second class of firms mostly belongs to the category of NFs, according to US nomenclature, while non corporate firms may belong to either category. Our curiosity is attracted by different entry patterns of NFs and EFs and our aim is to interpret them. According to recent literature, firms carry out an irreversible investment, such as entry, only if market prices are strictly larger than average total costs (Marshallian point). However, the trigger price that makes firms become active is affected by institutional rules, the existence of profit sharing, efficiency wages, exit options - i.e. partial reversibility -, financial constraints. Then, the internal organization of a newborn firm may make the difference. In a continuous time stochastic environment, where firms bear a sunk cost, we model entry as a growth option. On the trace of distinct objective functions we show that NFs and EFs have specific entry patterns in terms of output price and/or size. Why? Simply because they react in diverse fashions to market price volatility. In this sense we are able to show that, in most cases, the NF is locally less risky. This makes the NF better suited to enter under conditions of higher volatility. This exactly corresponds to what happened during the years between 1997-2001.

Suggested Citation

  • Michele Moretto & Gianpaolo Rossini, 2005. "Start-up Entry Strategies: Employer vs. Nonemployer firms," Working Papers 2005.13, Fondazione Eni Enrico Mattei.
  • Handle: RePEc:fem:femwpa:2005.13
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    References listed on IDEAS

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    1. Pencavel, John & Craig, Ben, 1994. "The Empirical Performance of Orthodox Models of the Firm: Conventional Firms and Worker Cooperatives," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 718-744, August.
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    6. Michele Moretto, 1999. "Optimal Capacity Adjustment by a Multiplant Firm," Working Papers 1999.28, Fondazione Eni Enrico Mattei.
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    Cited by:

    1. Michele Moretto & Gianpaolo Rossini, 2008. "Are Workers' Enterprises Entry Policies Conventional?," LABOUR, CEIS, vol. 22(2), pages 369-381, June.

    More about this item

    Keywords

    Entry strategies; Uncertainty; Nonemployer; Employer firms;

    JEL classification:

    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L3 - Industrial Organization - - Nonprofit Organizations and Public Enterprise
    • J54 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Producer Cooperatives; Labor Managed Firms
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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