When Will Entrepreneurs Choose to Make Themselves Replaceable?

Joshua Gans

No 34271, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines when and why entrepreneurs choose to standardise their ventures and make themselves replaceable, extending Rajan's (2012) analysis within a property rights framework. A model is developed where entrepreneurs face finite pools of potential replacements and may remain with their ventures post-IPO, rather than retiring as in Rajan's setting. The analysis yields two main results. First, when worker effort is fully contractible, entrepreneurs never choose to standardise, preferring to remain irreplaceable to maximise their bargaining power. Second, when key workers exert non-contractible effort that affects firm value, standardisation becomes beneficial as it motivates worker performance while managing the entrepreneur's replaceability. The optimal level of standardisation increases with the entrepreneur's equity stake, creating a ``dead zone" where entrepreneurs retain control but will not sell to outsiders. I extend the model to allow replacement of both entrepreneurs and workers, showing that standardisation can serve to reduce the bargaining power of all participants. The findings provide testable predictions about the relationship between equity structures, replacement market depth, and organisational design choices, while highlighting the strategic trade-offs entrepreneurs face between maintaining founder-specific advantages and creating transferable value for investors.

JEL-codes: D23 G30 L23 (search for similar items in EconPapers)
Date: 2025-09
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