Journal of Economic Perspectives: Vol. 28 No. 3 (Summer 2014)

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Entrepreneurship as Experimentation

Article Citation

Kerr, William R., Ramana Nanda, and Matthew Rhodes-Kropf. 2014. "Entrepreneurship as Experimentation." Journal of Economic Perspectives, 28(3): 25-48.

DOI: 10.1257/jep.28.3.25

Abstract

Entrepreneurship research is on the rise but many questions about the fundamental nature of entrepreneurship still exist. We argue that entrepreneurship is about experimentation; the probabilities of success are low, extremely skewed, and unknowable until an investment is made. At a macro level, experimentation by new firms underlies the Schumpeterian notion of creative destruction. However, at a micro level, investment and continuation decisions are not always made in a competitive Darwinian contest. Instead, a few investors make decisions that are impacted by incentive, agency, and coordination problems, often before a new idea even has a chance to compete in a market. We contend that costs and constraints on the ability to experiment alter the type of organizational form surrounding innovation and influence when innovation is more likely to occur. These factors not only govern how much experimentation is undertaken in the economy, but also the trajectory of experimentation, with potentially very deep economic consequences.

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Authors

Kerr, William R. (Harvard U)
Nanda, Ramana (Harvard U)
Rhodes-Kropf, Matthew (Harvard U)

JEL Classifications

G24: Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
J23: Labor Demand
L26: Entrepreneurship
M13: New Firms; Startups
O31: Innovation and Invention: Processes and Incentives

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