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Matching of Individuals for Start-Ups: A Test of the O-Ring Theory

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  • Müller, Bettina

Abstract

In this paper I analyse how individuals match for for the purpose of setting up a new firm. As a theoretical basis I use the O-ring theory introduced by Kremer (1993) and applied to new firms by Fabel (2004). The O-ring theory predicts that individuals segregate between firms according to their level of ability. Further, the theory implies that a higher average ability level within firms is positively related to both the number of individuals and capital per head. Using a rich employer-employee data set on the whole population of Danish firms founded in 1998 most of the predictions of the O-ring theory are rejected. I find that individuals do not match with individuals with the same level of ability. Furthermore, ability and firm size turn out to be negatively correlated. There is only some support for the hypothesis concerning the positive relationship between ability and capital per head.

Suggested Citation

  • Müller, Bettina, 2008. "Matching of Individuals for Start-Ups: A Test of the O-Ring Theory," ZEW Discussion Papers 08-112, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  • Handle: RePEc:zbw:zewdip:7502
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    References listed on IDEAS

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    1. Giovanni Maggi & Gene M. Grossman, 2000. "Diversity and Trade," American Economic Review, American Economic Association, vol. 90(5), pages 1255-1275, December.
    2. Susana Iranzo & Fabiano Schivardi & Elisa Tosetti, 2008. "Skill Dispersion and Firm Productivity: An Analysis with Employer-Employee Matched Data," Journal of Labor Economics, University of Chicago Press, vol. 26(2), pages 247-285, April.
    3. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, pages 251-334.
    4. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-1059, October.
    5. Philipp Koellinger, 2008. "Why are some entrepreneurs more innovative than others?," Small Business Economics, Springer, vol. 31(1), pages 21-37, June.
    6. Timothy Dunne & Lucia Foster & John Haltiwanger & Kenneth R. Troske, 2004. "Wage and Productivity Dispersion in United States Manufacturing: The Role of Computer Investment," Journal of Labor Economics, University of Chicago Press, vol. 22(2), pages 397-430, April.
    7. Milgrom, Paul & Roberts, John, 1995. "Complementarities and fit strategy, structure, and organizational change in manufacturing," Journal of Accounting and Economics, Elsevier, vol. 19(2-3), pages 179-208, April.
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    More about this item

    Keywords

    Entrepreneurship; O-Ring Theory; Theory Test;

    JEL classification:

    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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