Spin-offs of Entrepreneurial Firms: an O-Ring Approach The O-Ring theory provides a framework to analyse the emergence of firms organized as partnerships. The owner-managers of such entrepreneurial firms can benefit from ability matching within their production teams. However, they must also bear the project risk. Risk-aversion then induces a second-best solution. At the same time, integrated firms managed on behalf of risk-neutral residual-claimants face information and/or enforcement problems. Hence, they cannot organize ability-matched teams. It is shown that 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. The paper constitutes a significantly revised version of the study formerly entitled "The Emergence of a New Economy: An O-Ring Approach", Department of Economics, University of Konstanz, Discussion Paper Series I - 314

Keywords: O-Ring Theory; Ability Matching; Entrepreneurial Firms; Managed Firms (search for similar items in EconPapers)
JEL-codes: M2 L2 D2 (search for similar items in EconPapers)
Date: 2003-05-19

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