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Open Access Publications from the University of California

Essays in Entrepreneurship

  • Author(s): Sarada, Sarada
  • et al.

This dissertation contains three essays in entrepreneurship. Entrepreneurship is a key generator of economic growth. Entrepreneurial firms innovate, both on the product and process margins, creating new technologies and organizational novelties, bringing about positive spillovers to the economy as a whole. As such, understanding the factors underlying such activity is vital. This dissertation is concerned with who becomes an entrepreneur and why he or she does so, what factors influence the success of an entrepreneurial venture, and what types of institutions best facilitate entrepreneurial activity. The first chapter resolves a longstanding empirical puzzle; that most entrepreneurs enter and persist in self-employment, despite lower initial earnings and earnings growth (Hamilton, 2000). I hypothesize that reported income is not a good measure for the returns to self-employment. The self-employed have the ability to underreport earnings (estimated to be between 18 and 57 percent (Slemrod, 2007)), and can compensate themselves in various ways that do not manifest as reported labor income. The estimation strategy employed to test this hypothesis relies on the presumption that reported consumption by the self-employed will not be systematically misreported, even though income can easily be. Using longitudinal data from the PSID, I find that while individuals report earning 27 percent less in self- employment they in fact consume 5 percent more. This implies a 32 percent differential between reported wage and consumption for the self-employed. Furthermore, this increased consumption does not seem to be offset by lower savings or higher uncertainty. Other results include that the self-employed work longer hours and that lifetime consumption is no lower for those who leave self- employment. The second chapter links the network structure amongst initial employees to the performance of a newly founded firm. We use a large employee-employer linked panel data set from Brazil that allows us to track workers across jobs and establish whether new firm employees have prior joint work experience. We use this information to construct a quantifier for network concentration using the Herfindahl Hirschman Index (HHI), and test the impact of network concentration on new firm performance as measured by survival, employment, and wages. We find that new firms with higher network concentrations, i.e. wherein initial employees have worked together previously, are on average larger, have higher wages and survive longer when controlling for industry fixed effects and employees' human capital, demographic characteristics, formal sector experience, and size of parent firms. This association increases with the initial size of the newly founded firm. However, we find a negative relationship between network concentration and initial firm growth. Finally, we look at how the size of an individual's parent firm affects the success of her new entrepreneurial venture and find that small firm experience correlates with better survival rates, but lower employment and average wages at the new firm. The third chapter examines the conditions under which an informal network may decide to formalize into an entrepreneurial organization. Such organizations are formal, not-for-profit entities whose main objective is to facilitate networking so as to generate partnerships leading to entrepreneurial ventures. In order to create fruitful business partnerships, both the informal network and the formal organizations seek to grow. The growth process in the informal network occurs via bilateral sponsorship which rigorously screens entrants and is therefore slow, while that for a formal organization is much faster but less certain to only admit high types. We formally model these two entities and set the stage for an analysis of the tradeoffs between them

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