Entrepreneurship Group Meets

December 2, 2011
Josh Lerner of Harvard Business School and Antoinette Schoar of MIT, Organizers

Ola Bengtsson, University of Illinois; Magnus Johannesson, Stockholm School of Economics; and Tino Sanandaji, University of Chicago
Do Women Have a Less Entrepreneurial Personality?

A striking fact about entrepreneurship is that the number of male entrepreneurs greatly exceeds the number of female ones. Using detailed survey data from Sweden, Bengtsson, Johannesson, and Sanandaji study to what extent gender -sprecific personality traits can explain this gender gap. The researchers show that women have markedly different psyches than men (11 out of 14 traits differ), and that entrepreneurs have markedly different psyches than non-entrepreneurs (8 out of 14 traits differ). However, the gender differences in personality traits do not in a clear-cut way reduce women's likelihood of being an entrepreneur. On the one hand, women are less likely to be entrepreneurs because they are more risk averse, have weaker internal locuses of control, are less tolerant of greed, and have a less favorable attitude towards civic engagements. On the other hand, women are more likely to be entrepreneurs because they are less ambiguity-averse and less behaviorally inhibited. The authors find that, in the aggregate, gender differences in personality traits explain a relatively modest part (estimated at 21-32 percent) of the gender gap in entrepreneurship. Most of the entrepreneurship gap is thus explained by something other than gender differences in psyche. In addition to drawing this conclusion, they show that entrepreneurial traits are generally not more prevalent for non-entrepreneur self-employed individuals, and that gender differences in traits can explain much less of the gender gap in non-entrepreneurial self-employment. These latter findings highlight that entrepreneurship is distinct from other types of self-employment.

Konrad Burchardi, London School of Economics, and Tarek Alexander Hassan, University of Chicago and NBER

The Economic Impact of Social Ties: Evidence from German Reunification (NBER Working Paper No. 17186)

Burchardi and Hassan use the fall of the Berlin Wall in 1989 to show that personal relationships which individuals maintain for non-economic reasons can be an important determinant of regional economic growth. They show that West German households who have social ties to East Germany in 1989 experience a persistent rise in their personal incomes after the fall of the Berlin Wall. Moreover, the presence of these households significantly affects economic performance at the regional level: it increases the returns to entrepreneurial activity, the share of households who become entrepreneurs, and the likelihood that firms based within a given West German region invest in East Germany. As a result, West German regions which (for idiosyncratic reasons) have a high concentration of households with social ties to the East exhibit substantially higher growth in income per capita in the early 1990s. A single standard deviation rise in the share of households with social ties to East Germany in 1989 is associated with a 4.6 percentage point rise in income per capita over six years. The authors interpret these findings as evidence of a causal link between social ties and regional economic development.

Luis Garicano, London School of Economics; Claire LeLarge, SESSI; and John Van Reenen, London School of Economics and NBER
Firm Size Distortions and the Productivity Distribution: Evidence from France

A major empirical challenge in economics is identifying how regulations (such as labor protection) affect economic efficiency. Almost all countries have regulations that increase costs when firms cross a discrete size threshold. Garicano, LeLarge and Van Reenen show how these size-contingent regulations can be used to identify the equilibrium and welfare effects of regulation by combining a new model with the joint firm-level distribution of size and productivity. This framework adapts the Lucas (1978) model to a world with size-contingent regulations and applies it to France where there are sharp increases in firing costs (which are modeled as a labor tax) when firms employ 50 or more workers. Using administrative data on the population of firms in 2002 through 2007, the authors show how this regulation has major effects on the distribution of firm size (a "broken power law") and productivity. They then econometrically recover the key parameters of the model in order to estimate the costs of regulation, which appear to be non-trivial.

Luis Cabral, New York University
Good Turnover and Bad Turnover: Barriers to Business and Productivity

Entrepreneurship, as reflected in industry turnover rates, is a central force behind output and productivity growth. However, cross-country comparisons suggest that turnover rates are remarkably independent of barriers to business: Singapore, one of the most entry-friendly countries in the world, has the same industry turnover rate as Uzbekistan, a country where entry is considerably more difficult. Cabral suggests that the solution to this apparent puzzle lies in the effect of survival barriers which, like entry barriers, are higher in Uzbekistan than in Singapore. In other words, with similar turnover rates, Singapore is characterized by "good" turnover, whereas Uzbekistan is characterized by "bad" turnover. By means of reduced-form econometric estimation and structural model calibration, Cabral estimates the impact of various barriers to business. While entry barriers decrease firm turnover and survival barriers increase industry turnover, both types of barriers to business decrease productivity, either by decreasing the extent of "good turnover or by increasing the extent of "bad" turnover.

Thomas J. Chemmanur, Boston College; Elena Loutskina, University of Virginia; and Xuan Tian, Indiana University
Corporate Venture Capital, Value Creation, and Innovation

Chemmanur, Loutskina, and Tian analyze how corporate venture capitalists (CVCs) differ from independent venture capitalists (IVCs) in nurturing innovation for entrepreneurial firms. Using the NBER Patent Citation database, the authors find that CVCs help their portfolio firms achieve a higher degree of innovation productivity, as measured by their patenting, although these firms are younger, riskier, and less profitable than the entrepreneurial firms backed by IVCs. To establish causality, the researchers use both an instrumental variable approach and a differences-in-differences approach, and show that their baseline results are unlikely to be driven by better project selection abilities on the part of CVCs. Finally, this analysis suggests that the mechanisms through which CVCs are able to better nurture innovation are their greater tolerance for failure and their superior knowledge of the entrepreneurial firms' technology because of the strategic fit between CVCs' parent firms and the entrepreneurial firms backed by them.

Deepak Hegde, New York University; and Justin Tumlinson, Ifo Institute at the University of Munich
Can Birds of a Feather Fly Together? Evidence For the Economic Payoffs of Ethnic Homophily

Does ethnic homophily (that is, love for ethnically similar individuals) influence investment decisions and their payoffs? Hegde and Tumlinson investigate this question using novel data on the ethnic origins of 22,000 U.S.-based Venture Capitalists (VCs) and 98,000 top-level executives of the startup companies they invested in from 1991 to 2010. They find that VCs are more likely to invest in companies with executives that are ethnically similar to themselves. Evidence for homophily is strongest during early rounds of investment, when information costs of the relationship are high, and for ethnicities associated with "collectivist" cultures, such as Japanese, Korean, and Chinese. Ethnic homophily between VCs and their portfolio companies is positively related to several measures of the companies' performance, including: 1) survival to subsequent rounds of funding; 2) probability of issuing an Initial Public Offering (IPO); and 3) net income after the IPO. The authors estimate that a company with one additional executive who shares the ethnicity of a VC's partners is associated with a near doubling of the expected internal rate of return for the VC from the investment. Ethnic homophily between VCs and startups has profound economic benefits, brought about through a reduction of the information costs of the relationship.

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