December 4, 2015
Antoinette Schoar of MIT and Josh Lerner of Harvard University, Organizers

Entrepreneurship and Employment

Deborah Goldschmidt, Boston University, and Johannes F. Schmieder, Boston University and NBER

The Rise of Domestic Outsourcing and the Evolution of the German Wage Structure (NBER Working Paper No. 21366)

The nature of the relationship between employers and employees has been changing over the last decades, with firms increasingly relying on contractors, temp agencies and franchises rather than hiring employees directly. Goldschmidt and Schmieder investigate the impact of this transformation on the wage structure by following jobs that are moved outside of the boundary of lead employers to contracting firms. For this end they develop a new method for identifying outsourcing of food, cleaning, security and logistics services in administrative data using the universe of social security records in Germany. The researchers document a dramatic growth of domestic outsourcing in Germany since the early 1990s. Event-study analyses show that wages in outsourced jobs fall by approximately 10-15% relative to similar jobs that are not outsourced. They find evidence that the wage losses associated with outsourcing stem from a loss of firm-specific rents, suggesting that labor cost savings are an important reason why firms choose to contract out these services. Finally, the researchers tie the increase in outsourcing activity to broader changes in the German wage structure, in particular showing that outsourcing of cleaning, security and logistics services alone accounts for around 9 percent of the increase in German wage inequality since the 1980s.

Tania Babina and Paige Ouimet, University of North Carolina, Chapel Hill, and Rebecca Zarutskie, Federal Reserve Board

Going Entrepreneurial? IPOs and New Firm Creation

Using matched employee-employer data from the U.S. Census, Babina, Ouimet, and Zarutskie examine the impact of a successful initial public offering (IPOs) on a firm's existing employees and their future career choices. Using an instrumental variables strategy, the researchers find strong evidence that going public induces employees to depart for start-ups. Moreover, this result is specific to start-ups. The authors find no change in the rate of employee departures to established firms. They suggest and find evidence consistent with two non-mutually exclusive mechanisms which can explain this pattern. First, following an IPO, many employees who received large stock grants in the past are able to cash out. This shock to employee wealth may allow employees to better tolerate the risks associated with joining a start-up. Alternatively, employees may leave following an undesirable cultural change following the IPO. The results suggest that the recent secular decline in IPO activity and new firm creation in the U.S. may be causally linked. The recent decline in IPOs means fewer workers move to startups, decreasing overall new firm creation in the economy.

Information Aggregation

Thomas J. Chemmanur, Boston College; Gang Hu, Hong Kong Polytechnic University; and Chaopeng Wu, Xia Men University

High Differentiation and Low Standardization: The Role of Venture Capitalists in Transforming the Governance and Management of Family Firms

Using a theoretical framework based on Rajan (2012), Chemmanur, Hu, and Wu empirically analyze how venture capital (VC) investments "standardize" family firms by transforming their corporate governance and top management. The researchers find that family members are more likely to depart from management positions in VC-backed compared to non-VC-backed firms. Further, family control rights, cash-flow rights, and the separation between them drop more in VC-backed firms. These effects are stronger when VCs have greater bargaining power or board representation. The above effects of VC-backing are causal. The authors find that the standardization of VC-backed family firms yields higher IPO firm valuation and post-IPO operating performance.

Ulf Axelson and Igor Makarov, London School of Economics

Informational Black Holes in Financial Markets

Axelson and Makarov study how efficient primary financial markets are in allocating capital when information about investment opportunities is dispersed across market participants. Paradoxically, the very fact that information is valuable for making real investment decisions destroys the efficiency of the market. To add to the paradox, as the number of market participants with useful information increases a growing share of them fall into an "informational black hole," making markets even less efficient. Contrary to the predictions of standard theory, social surplus and the revenues of an entrepreneur seeking financing can be decreasing in the size of the financial market, the linkage principle of Milgrom and Weber (1982) may not hold, and collusion among investors may enhance efficiency.

Network Effects in Entrepreneurship

Serguey Braguinsky, Carnegie Mellon University and NBER, and David A. Hounshell, Carnegie Mellon University

History and Nanoeconomics in Strategy and Industry Evolution Research: Lessons from the Meiji-Era Japanese Cotton Spinning Industry

This paper uses nanoeconomics and historical methodology to advance strategic management research, focusing on the coevolution of firms and industry. Braguinsky and Hounshell demonstrate the power of these methods through a study of Meiji Era Japanese cotton spinning industry from its state-supported founding through its development into a sustained, globally competitive presence. The researchers shed light on the role of superior human and organizational capabilities of industry leaders. In particular, they demonstrate that these helped the industry leaders to overcome deep, systematic structural factors to make a few firms highly productive and able to move the entire industry into high growth and to respond to and thrive in dynamic environments on the world stage.

William R. Kerr, Harvard University and NBER, and Martin Mandorff, Swedish Competition Authority

Social Networks, Ethnicity, and Entrepreneurship (NBER Working Paper No. 21597)

Kerr and Mandorff study the relationship between ethnicity, occupational choice, and entrepreneurship. Immigrant groups in the United States cluster in specific business sectors. For example, Koreans are 34 times more likely than other immigrants to operate dry cleaners, and Gujarati-speaking Indians are 108 times more likely to manage motels. The researchers develop a model of social interactions where non-work relationships facilitate the acquisition of sector-specific skills. The resulting scale economies generate occupational stratification along ethnic lines, consistent with the reoccurring phenomenon of small, socially-isolated groups achieving considerable economic success via concentrated entrepreneurship. Empirical evidence from the United States supports the model's underlying mechanisms.

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