Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/38916
Authors: 
Bac, Mehmet
Inci, Eren
Year of Publication: 
2010
Series/Report no.: 
CESifo working paper Industrial Organisation 3071
Abstract: 
We study a model of network formation and start-up financing with endogenous entrepreneurial type distribution. A hub firm admits members to its network based on signals about entrepreneurs' types. Network membership is observable, which allows lenders to offer different interest rates to network and stand-alone entrepreneurs. We show that a network outcome can display a smaller number of high-type entrepreneurs even though the network is neither nepotistic nor informationally disadvantaged. While a welfare-improving network can emerge as a technically stable or unstable equilibrium, one that decreases welfare is always formed by a technically unstable equilibrium. However, the adverse welfare effects of a network and its corresponding type configuration may persist because ex-post high type entrepreneurs prefer to stay high type whereas those who wish to become high-type may need some time to react.
Subjects: 
entrepreneur
network
start-up financing
JEL: 
D82
D85
L26
Document Type: 
Working Paper

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