Movers and Shakers

Robert Akerlof and Richard Holden

The Quarterly Journal of Economics, 2016, vol. 131, issue 4, 1849-1874

Abstract: Most projects, in most walks of life, require the participation of multipleparties. While it is difficult to unite individuals in a common endeavor, somepeople, who we call “movers and shakers,” seem able to do it. The articlespecifically examines moving and shaking of an investment project, whose returndepends on its quality and the total capital invested in it. We analyze a modelwith two types of agents: managers and investors. Managers and investorsinitially form social connections. Managers then bid to buy control of theproject, and the winning bidder puts effort into making investors aware of it.Finally, a subset of aware investors are given the chance to invest and theydecide whether to do so after receiving private signals of the project’squality. We first show that connections are valuable since they make it easierfor a manager to “move and shake” the project (i.e., obtain capital frominvestors). When we endogenize the network, we find that while managers areidentical ex ante, a single manager emerges as most connected; he consequentlyearns a rent. In extensions, we move away from the assumption of ex anteidentical managers to highlight forces that lead one manager or another tobecome a mover and shaker. Our theory sheds light on a range of topics, including entrepreneurship, venture capital, and anchor investments.

Date: 2016
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