The role of individual financial contributions in the formation of entrepreneurial teams

Galina Vereshchagina

European Economic Review, 2019, vol. 113, issue C, 173-193

Abstract: This paper studies how entrepreneurs, limited in how much they are able to contribute to a joint business, organize in partnerships, and how this process is impacted by the frictions common for team production. It demonstrates that moral hazard and reliance on simple equity sharing contracts create incentives for the entrepreneurs making large contributions to team up together, even if the production technology exhibits decreasing returns to scale to total investment. The paper formalizes this novel mechanism in a matching model and illustrates that the model’s predictions regarding co-owners’ financial contributions and ownership shares are consistent with the empirical evidence from the Kauffman Firm Survey data.

Keywords: Entrepreneurship; Team production; Assortative matching; Partnerships; Moral hazard; Equity sharing; Borrowing constraints (search for similar items in EconPapers)
JEL-codes: D2 D82 G32 L23 L26 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:113:y:2019:i:c:p:173-193

DOI: 10.1016/j.euroecorev.2019.01.005

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