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CFGE-10: Entrepreneurial Finance
Keeping Options Open: What Motivates Entrepreneurs?
University of Pennsylvania, United States of America
Using French administrative data on job-creating entrepreneurs, I estimate a life-cycle model in which risk-averse individuals can start businesses and return to paid employment. I estimate that the unobserved benefits of entrepreneurship represent 6,100 pre-tax euros per year (some 15% of profits), which adds up to 67,000 euros over the average entrepreneurial spell. For new entrepreneurs, the option of returning to paid employment is worth 82,000 euros. The main source of option value is not the unobserved heterogeneity in entrepreneurial abilities but rather the random-walk component of productivity. Together, unobserved benefits and this option value explain 42% of firm creations.
Entrepreneurial Teams: Diversity of Experience and Firm Growth
1Boston College; 2University of Maryland
We use the employer-employee linked data to track employment history of employees prior to startup formation and construct measures of diversity of experience within founding teams for a large cohort of startup firms in the U.S. We find that founding teams with broader pre-startup industry exposure outperform their matched peers in the same cohorts, industries and local economies. They grow faster over the first four years and are more likely to achieve outlier growth (top 1%). Our results hold when we use county-level industry distribution to instrument for the observed team-level experience. We also find that the effect of team diversity is independent of the potential benefit of having a “jack of all trades” founder. Using information from a novel dataset, we construct an industry-level measure for innovativeness and show that the positive effect of team experience diversity on startup performance is stronger in more innovative industries. Overall, our results suggest that startups in which the founding team has a more diverse set of skills achieve greater initial success.
Entrepreneurship and Regional Windfall Gains: Evidence from the Spanish Christmas Lottery
1Columbia University and NBER; 2Esade Business School, Ramon Lull University; 3Nova School of Business and Economics
We study the effect of regional disposable income on entrepreneurial activity. Using the randomized assignment of monetary prizes provided by the Spanish Christmas Lottery as exogenous variation in regional disposable income, we find higher firm creation and self-employment in winning provinces. Our estimates imply that 46 new firms are created for every 1,000 euros increase in disposable income per capita. The effect is present in both the non-tradable and tradable industries. In addition, the effect is more pronounced in regions with lower economic, financial, and social development. Conditional on entry, firms created in winning provinces are larger, create more value-added, rely more on equity, and are more likely to survive in the long run. Our results suggest that aggregate demand, financial constraints, and regional development are important drivers of entrepreneurial activity.
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