Spinoffs of Entrepreneurial Firms: An O-Ring Approach

Oliver Fabel ()

Journal of Institutional and Theoretical Economics (JITE), 2004, vol. 160, issue 3, pages 416-

Abstract: The O-ring theory is used to analyze the emergence of firms organized as partnerships. The owner-managers of such entrepreneurial firms benefit from ability matching within their production teams. However, they must bear the project risk. Risk aversion then induces a second-best solution. Integrated firms managed on behalf of risk-neutral residual claimants face information and/or enforcement problems. Hence, they cannot organize ability-matched teams. There exists an equilibrium such that groups of individuals sharing a superior ability level will found entrepreneurial firms. Low-quality individuals will be employed by managed firms, which hire randomly.

JEL-codes: D2 L2 M2 (search for similar items in EconPapers)
Date: 2004
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