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The Old‐Boy Network and the Quality of Entrepreneurs
Author(s) -
Bac Mehmet,
Inci Eren
Publication year - 2010
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2010.00273.x
Subject(s) - disadvantaged , welfare , quality (philosophy) , distribution (mathematics) , business , network formation , outcome (game theory) , microeconomics , economics , market economy , computer science , economic growth , mathematics , epistemology , world wide web , mathematical analysis , philosophy
We study a model of network formation and start‐up financing with endogenous entrepreneurial type distribution. A hub firm admits members to its network based on signals about entrepreneurs' types. Network membership is observable, which allows lenders to offer different interest rates to network and stand‐alone entrepreneurs. We show that a network outcome can display a smaller number of high‐type entrepreneurs even though the network is neither nepotistic nor informationally disadvantaged. Although a welfare‐improving network can emerge as a technically stable or unstable equilibrium, one that decreases welfare is always formed by a technically unstable equilibrium. However, the adverse welfare effects of a network and its corresponding type configuration may persist because ex post high‐type entrepreneurs prefer to stay high type whereas those who wish to become high type may need some time to react.