The Role of Entrepreneurial Wealth in Team Formation

Galina Vereshchagina

No 1178, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the formation of teams in the economy in which entrepreneurs dier by how much they can contribute to the joint firm. First, it documents, using the Panel Study of Entrepreneurial Dynamics, that the individual contributions are positively correlated across owners, even after the effects of industry and demographic factors are taken into account. Second, it develops a model where such sorting patterns arise endogenously due to the presence of moral hazard -- a common friction of joint production -- even if the production technology exhibits decreasing returns to capital. In contrast, had there been no moral hazard, decreasing returns would necessitate negative correlation between the owners' ï¬ nancial contributions.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1178

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