Issue 1

Volume 26 JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
Spring 2017

Taking the Leap: The Determinants of Entrepreneurs Hiring Their First Employee

Robert W. Fairlie and Javier Miranda
Job creation is one of the most important aspects of entrepreneurship, but we know relatively little about the hiring patterns and decisions of start-ups. Longitudinal data from the Integrated Longitudinal Business Database (iLBD), Kauffman Firm Survey (KFS), and the Growing America through Entrepreneurship (GATE) experiment are used to provide some of the first evidence in the literature on the determinants of taking the leap from a nonemployer to employer firm among start-ups. Several interesting patterns emerge regarding the dynamics of nonemployer start-ups hiring their first employee. Hiring rates among the universe of nonemployer start-ups are very low, but increase when the population of nonemployers is focused on more growth-oriented businesses such as incorporated and employer identification number businesses. If nonemployer start-ups hire, the bulk of hiring occurs in the first few years of existence. After this point in time, relatively few nonemployer start-ups hire an employee. Focusing on more growth- and employment-oriented start-ups in the KFS, we find that Asian-owned and Hispanic-owned start-ups have higher rates of hiring their first employee than white-owned start-ups. Female-owned start-ups are roughly 10 percentage points less likely to hire their first employee by the first, second, and seventh years after start-up. The education level of the owner, however, is not found to be associated with the probability of hiring an employee. Among business characteristics, we find evidence that business assets and intellectual property are associated with hiring the first employee. Using data from the largest random experiment providing entrepreneurship training in the United States ever conducted, we do not find evidence that entrepreneurship training increases the likelihood that nonemployers hire their first employee.

Venture Capital Investments in Europe and Portfolio Firms’ Economic Performance: Independent Versus Corporate Investors

Massimo G. Colombo and Samuele Murtinu
Using a new European Commission-sponsored longitudinal dataset—the VICO dataset—we assess the impact of independent (IVC) and corporate venture capital (CVC) investments on the economic performance of European high-tech entrepreneurial firms during the period 1992–2010. After controlling for potential sources of endogeneity and selection bias, our results indicate that both IVC and CVC investments boost portfolio firms' economic performance. These effects are mostly due to an increase in real sales value. Moreover, the dynamics of the impact of VC investments on firms’ overall economic performance and its components—real sales value, real fixed assets, and real labor costs—differs depending on the type of investor. Finally, we do not detect any impact related to the syndication of investments by both IVC and CVC investors.

Do Dominant Firms Provide More Training?

Christos Bilanakos, Colin P. Green, John S. Heywood, and Nikolaos Theodoropoulos
A canonical Cournot competition model shows that the profitability of training can increase as the number of competitors decreases. British establishment evidence from 1998, 2004, and 2011 confirms that firms in less competitive markets provide more formal training. This persists within three separate cross-sections and in two separate panel estimates. It persists with alternative measures of training, with alternative measures of market competition and in estimates designed to account for endogeneity. These results suggest that a dominant product market position, indeed, increases the incentives to invest in training.

Competition with Aftermarket Power When Consumers Are Heterogeneous

Dainis Zēgners, Tobias Kretschmer
We study a model of competitive foremarkets and partly monopolized aftermarkets. We show that high aftermarket power prompts firms to engage in inefficiently aggressive below-cost pricing in the foremarket. This inefficiency is driven by the presence of consumers with valuations below marginal cost. While for intermediate aftermarket power their presence leads to a competition-softening effect, for high aftermarket power firms attract increasing numbers of unprofitable consumers by aggressively pricing below cost. For high aftermarket power, firms' equilibrium profits can therefore be decreasing in aftermarket power but are always higher than for low aftermarket power. If firms engage in price discrimination by bundling the foremarket and aftermarket goods or by reducing their aftermarket power, they avoid selling to unprofitable consumers but also reduce the competition-softening effect. This decreases firms' equilibrium profits but increases consumer and social welfare.

Input Hedging, Output Hedging, and Market Power

David De Angelis, S. Abraham Ravid
We argue that commodity input hedging is different from commodity output hedging. Output hedging can be detrimental to “sector play.” Furthermore, firms with market power that hedge outputs have incentives to over-produce and distort market prices. In rational markets, such hedging will be expensive and we expect to see a negative relationship between hedging and market power in “output industries” but not in “input industries.” We test these predictions on a sample of S&P500 firms from 2001 to 2005. Our results support both hypotheses. Placebo tests show that the same empirical regularities do not apply to currency hedging. Finally, our empirical framework, which differentiates between hedging inputs and hedging outputs, can also help in reconciling conflicting results in prior studies.

Selective Hearing: Physician-Ownership and Physicians’ Response to New Evidence

David H. Howard, Guy David, Jason Hockenberry
Physicians, acting in their role as experts, are often faced with situations where they must trade off personal and patient welfare. Physicians’ incentives vary based on the organizational environment in which they practice. We use the publication of a major clinical trial, which found that a common knee operation does not improve outcomes for patients with osteoarthritis, as an “informational shock” to gauge the impact of physicians’ agency relationships on treatment decisions. Using a 100% sample of procedures in Florida from 1998 to 2010, we find that publication of the trial reduced procedure volume, but the magnitude of the decline was smaller in physician-owned surgery centers. Incentives affected physicians’ reactions to evidence.

Firm-Driven Management of Longevity Risk: Analysis of Lump-Sum Forward Payments in Japanese Nursing Homes

Shinya Sugawara
This study analyzes a unique economic circumstance of longevity risk management in the Japanese private nursing home market. This circumstance takes the form of a lump-sum forward payment of lifetime rent by residents, which leaves most longevity risk to be covered by homes. To analyze this circumstance, I construct a structural econometric model of industrial organization for this market. For the underlying structure of longevity risk, I assume that both individual consumers and nursing homes utilize the subjective evaluation. My empirical analysis detects excess payments that can be compensated for only by an unrealistically long stay in nursing homes. This finding implies the existence of the exaggerated evaluation of longevity by economic agents. Thus, appropriate government intervention to help hedge longevity risk might improve social welfare.

Voluntary Assurance of Voluntary CSR Disclosure

Mark Bagnoli and Susan G. Watts
We study a firm's decisions to engage in socially responsible activities, voluntarily report on them, and purchase external assurance of the report. In our signaling model, neither firm type nor the level of activity is observed. We show that if voluntary assurance is not too expensive, the firm that engages in more socially responsible activities purchases external assurance and thus “selects” a separating equilibrium. As a result, CSR reports can be used to infer the level of activity and this causes all firms to engage in more socially responsible activity. Further, when voluntary assurance is required to support a separating equilibrium, greater monitoring by social activists increases the chosen quality of voluntary assurance—voluntary assurance and monitoring by social activists are complements, not substitutes.

Information Acquisition and the Equilibrium Incentive Problem

Alice Peng-Ju Su
I study the optimal incentive provision in a principal–agent relationship with costly information acquisition by the agent. I emphasize that adverse selection or moral hazard is the principal's endogenous choice by inducing or deterring information acquisition. The principal designs the contract not only to address an existing incentive problem but also to implement its presence. Implementation of adverse selection relies on a steeper information rent to the agent than the standard menu, such that the agent is motivated to distinguish the efficient state of nature from the inefficient. Moral hazard is implemented by replacing the benchmark debt contract with a debt-with-equity-share contract, such that the agent does not attempt to acquire information to either avoid debt or to extract rent.

Match-Fixing in a Monopoly Betting Market

Parimal Kanti Bag and Bibhas Saha
A monopolist bookmaker may set betting odds on a fairly even contest to induce match-fixing by an influential corrupt punter. His loss to the corrupt punter is more than made up for by enticing enough ordinary punters to bet on the losing team. This result is in sharp contrast to competitive bookmaking, where even contests have been shown to be immune to fixing. The analysis also reveals a surprising result that the incidence of match-fixing can dramatically fall when match-fixing opportunities rise. This is shown by comparing two scenarios—when only one team is corruptible and when both are corruptible. For both teams corruptible, the bookmaker is uncertain about to which team the influential punter will have access, so carefully maneuvering the odds to induce match-fixing is too costly.