Incomplete contracts allocation eship society. Erik Stam
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Transcript of Incomplete contracts allocation eship society. Erik Stam
Incomplete Contracts and
the Allocation of Entrepreneurship in Society
Erik Stam Utrecht University School of Economics
Joint with Niels Bosma & Sander Wennekers
Global Entrepreneurship Monitor:
people who are involved in setting up an
independent business or
owners-managers of new businesses
Key question
• What explains the allocation of
entrepreneurship over new and established
organizations in society? (cf. Baumol 1990)
Entrepreneurship
• Recognition, evaluation and pursuit of
entrepreneurial opportunities by individuals
(Shane & Venkatamaran, 2000)
• Only in independent start-ups or owner-
managed businesses, for own risk and
reward (Knight 1921; Jensen & Meckling
1976)? Or…
• Governed within established organizations,
as entrepreneurial employee activity
(intrapreneurship)?
Schumpeter (1934: 74-75)
• ‘(...) in the first place we call entrepreneurs
not only those “independent”
businessmen in an exchange economy
who are usually so designated, but all who
actually fulfill the function by which we
define the concept, even if they are, as is
becoming the rule, “dependent”
employees of a company’.
...employees developing new business activities
for their employer
e.g. establishing a new outlet or subsidiary
and launching new products
or new product-market combinations
Entrepreneurial
Employee Activity
Independent
Entrepreneurship
Share of Entrepreneurial Employee Activity = EEA / (EEA+IE)
Entrepreneurial Activity
Theory of the Firm
• Default corporate governance situation in
entrepreneurship studies = independent
entrepreneurship: no separation of ownership
and management
• Employees will not pursue entrepreneurial
activities because:
– The employer perceives this to be too risky (probable
big losses); destructive entrepreneurship
– The employee expects rewards to be creamed off by
the employer
Arthur Fry
Ken Kutaragi
Jef Raskin (#31)
Paul Buchheit (#23)
Proxy entrepreneurs: derived judgement
(Knight 1921 -> Foss et al. 2007)
Incompleteness of labour contracts
• Positively related with returns productive proxy
entrepreneurship (but with diminishing returns)
• Positively related with costs destructive proxy
entrepreneurship (with increasing costs)
• Positively related to opportunity costs (loss of
productive routine work)
• Negatively related to probability of independent
(spin-off) entrepreneurship
Incompleteness
of the contract
Co
sts
an
d b
en
efi
ts
Opportunity costs
Employer
P: Productive proxy
entrepreneurship
D: Destructive proxy entrepreneurship
I*
Theoretical model:
benefits and costs, incompleteness of contract
• Opportunistic behavior will lead to higher
prevalence of complete, on the spot, contracting
in a product market (i.e. independent
entrepreneurship); even more so in societal
settings in which levels of generalized trust are
low
• In a societal setting in which social obligations
and reciprocity dominate, i.e. high levels of
generalized trust, more incomplete contracts
are prevalent, e.g. within organizations
Trust & Theory of the Firm
Key micro-macro assumption
• The degree of incompleteness of labor
contracts in organizations is reflected in
the share of Entrepreneurial Employee
Activity in the economy.
Institutions
Incompleteness
of contracts
Share of EEA in society
EEA
The share of entrepreneurial employee activity is
positively associated with the level of generalized trust
in society.
Hypothesis
Effect of increasing levels of generalized trust
on benefits and costs curves
and preferred degree of incompleteness
Incompleteness
of the contract
Co
sts
an
d b
en
efi
ts
P
D0
I0*
D1
I1*
Opportunity costs employer
Operational definitions
• Independent entrepreneurship: GEM
– People who are involved in setting up an independent business or owners-managers of new businesses
• EEA: employees developing new business activities for their employer, including establishing a new outlet or subsidiary and launching new products or new product-market combinations
– Leading role in idea development and/or preparation and implementation of new activities
TEA vs EEA
TEA
• 37% product innovative
• 15% growth ambitious
(>20 jobs)
EEA
• 64% product innovative
• 45% growth ambitious
(>20 jobs)
Macro level:
Intrapreneurship is much more strongly (positively) related to innovation
than independent entrepreneurship is
(Stam 2013 SBE)
US
RU
ZA
GR
NL
BE
FR
ES
HU
RO SW
UK
DK
SE
PL
DE
PE MX
AR
BR
CL
CO
MY
AU
SG
TH
JP KR
CN
TR
PK IR
DZ BB
PT
IE
FI
LT
LV
HR
SI
BA
CZ SK
PA VE
UY
TT JM
BD
TW
AE
R² = 0.1742
0
2
4
6
8
10
12
14
16
0 5 10 15 20 25 30
% o
f 1
8-6
4 p
op
ula
tio
n in
vo
lve
d i
n E
mp
loye
e E
ntr
ep
ren
eu
ria
l A
cti
vit
y
% of 18-64 population involved in Total early-stage independent Entrepreneurial
Activity
Algeria DZ Hungary HU Russia RU
Argentina AR Iran IR Singapore SG
Australia AU Ireland IE Slovakia SK
Bangladesh BD Jamaica JM Slovenia SI
Barbados BB Japan JP South Africa ZA
Belgium BE Korea KR Spain ES
Bosnia & Herz. BA Latvia LV Sweden SE
Brazil BR Lithuania LT Switzerland SW
Chile CL Malaysia MY Taiwan TW
China CN Mexico MX Thailand TH
Croatia HR Netherlands NL Trinidad & Tobago TT
Czech Republic CZ Pakistan PK Turkey TR
Denmark DK Panama PA United Arab Emir. UE
Finland FI Peru PE United Kingdom UK
France FR Poland PL United States US
Germany DE Portugal PT Uruguay UY
Greece GR Romania RO Venezuela VE
Dependent variable - II
UE
TW
JMTT
UY
VE
SK
CZ
BA
SI
HR
LV
LH
FI
IE
PT
BBDZ
IR
TRCN
KR
JP
TH
SG
AU
MY
COCL
BR
AR
MX PE
DE
PL
SEDK
UKSW
ROHU
ES
FR
BE
NL
GR
SA
RU
US
0%
10%
20%
30%
40%
50%
60%
70%
80%
0 5 10 15 20 25
Independent Entrepreneurial Activity
Shar
e o
f EE
A in
OEA
Algeria DZ Hungary HU Russia RU
Argentina AR Iran IR Singapore SGAustralia AU Ireland IE Slovakia SK
Bangladesh BD Jamaica JM Slovenia SIBarbados BB Japan JP South Africa ZA
Belgium BE Korea KR Spain ESBosnia & Herz. BA Latvia LV Sweden SE
Brazil BR Lithuania LT Switzerland SWChile CL Malaysia MY Taiwan TW
China CN Mexico MX Thailand THCroatia HR Netherlands NL Trinidad & Tobago TT
Czech Republic CZ Pakistan PK Turkey TRDenmark DK Panama PA United Arab Emir. UE
Finland FI Peru PE United Kingdom UKFrance FR Poland PL United States US
Germany DE Portugal PT Uruguay UYGreece GR Romania RO Venezuela VE
Independent variables
• Interpersonal trust (World Values Survey)
• Social security favoring employees (Global Entrepreneurship Monitor – National Expert Survey)
• Share of knowledge workers in total employment (International Labour Organization)
• Prevalence of employment in large organizations (Global Entrepreneurship Monitor – Adult Population Survey)
Conclusions • The share of entrepreneurial employee activity is
positively associated with the level of generalized trust in
society.
• Generalized trust lowers the level of destructive proxy
entrepreneurship, allowing more incomplete labor
contracts, which leads entrepreneurial action to be
allocated more to established organizations in society
(EEA)
Issues to discuss
• Measures of institutions
– Informal (+ Hofstede’s culture indicators,…)
– Formal (+ measures of employment protection, …)
• Too small number of cases (sensitivity to outliers)
• Causality (comparative static framework)
– Endogeneity: EEA –> large organizations
– Longitudinal research
• Theory (too narrow; too micro; better than no theory…)
• Study contracts
• Multilevel analysis: regional, organizational conditions
(and consequences)
• …