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Experiments on Entrepreneurship and Innovation

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Marriott Philadelphia Downtown, Meeting Room 305
Hosted By: Economic Science Association
  • Chair: Stephen Leider, University of Michigan

Experimental studies on entrepreneurial idea generation, confidence, and investment decisions

Soheil Hooshangi
,
Carnegie Mellon University
George Loewenstein
,
Carnegie Mellon University

Abstract

We present results of two completed studies, and experimental designs and predictions for two additional studies, all of which are focused on entrepreneurial decision making, and specifically on entrepreneurs’ confidence, predictions, and investment decisions. The two completed experiments employ a novel paradigm in which participants engage in generation of, and potentially investment in, an entrepreneurial idea. We found that individuals who generate a business idea form biased evaluations of economic potential of ideas. They are overconfident about the value of, and overly likely to invest in, their own idea, but, when they have proposed their own idea, are underconfident about the value of, and insufficiently likely to invest in ideas proposed by other people. Research subjects who have the opportunity to invest in another person’s idea, but have not proposed their own idea, are neither over- nor under-confident. In addition, we found that the threat that another investor can appropriate a declined investment opportunity increases willingness to invest.
The first in-process experiment further explores factors that impact confidence and performance of entrepreneurs in generating ideas. Participants proposed ideas, either individually or jointly and then forecast the amount of investment they believe their ideas would receive from a group of investors. We predict that collaborative idea generation yields more promising ideas than competitive idea generation, but also adds to idea generators’ tendency to overestimate the promise of the idea.
The second, planned, experiment examines the impact of a policy intervention on choosing between generating entrepreneurial ideas collaboratively versus individually. While collaborating with others in generating an entrepreneurial idea is likely to result in more promising ideas, individual’s decisions about whether to collaborate may not optimally reflect expected advantages of collaboration. The experiment is an attempt to investigate the presence of such a suboptimal pattern of collaboration in idea generation, and explores whether a policy intervention has the potential to shift the amount of collaboration in idea generation in a way that results in creation of more promising ideas.

Characterizing the Entrepreneur Using Experimental Economics

Saulo Barbosa
,
EMLyon
David J. Cooper
,
Florida State University and University of East Anglia
Krista J. Saral
,
Webster University Geneva
Marie Claire Villeval
,
GATE/CNRS and University of Lyon

Abstract

We study decision making by graduate students and entrepreneurship program participants in a variety of individual and group settings. Nascent and current entrepreneurs differ from non-entrepreneurs along several dimensions. Nascent entrepreneurs are more trustworthy than non-entrepreneurs and current entrepreneurs, and are also more likely to be overconfident. While current and nascent entrepreneurs are no more likely to choose competitive pay schemes than others, they react to competition by performing better. Current and nascent entrepreneurs are less cooperative, more patient, and more honest than non-entrepreneurs. Nascent entrepreneurs are surprisingly different than current entrepreneurs, including being far more likely to be women.

Experimental Evidence From Entrepreneurs on Job Selection and Risk Preferences

Marco Castillo
,
Texas A&M University
Ragan Petrie
,
Texas A&M University
Maximo Torero
,
World Bank

Abstract

Using a sample of small business entrepreneurs in a growing industrial sector in Lima Peru, we use incentivized experimental measures of risk preferences to examine selection into jobs and gender differences in willingness to take risks. We measure risk preferences of managers who are also owners (principals) and managers who are hired (agents) and confirm the theoretical finding that owners are more risk taking than agents. We also explore whether there are gender differences in the willingness to take risks and find, counter to previous studies, that women in this sector are more risk taking than men.

Designing Incentives in Startup Teams: Form and Timing of Equity Contracting

Evgeny Kagan
,
University of Michigan
Stephen Leider
,
University of Michigan
William Lovejoy
,
University of Michigan

Abstract

Entrepreneurial teams assign equity positions in their startups using a term sheet that details equity splits and conditions for being granted those splits. It is conventional wisdom in the entrepreneurial press that equal splits are poor choices. The conventional logic is that by not connecting rewards to contribution level equal split contracts can encourage free-riding behaviors. We experimentally test this conventional wisdom, among other entrepreneurial contracting hypotheses. Our results confirm the relationship between equal splits and depressed effort and contribution, but suggest a different causal sequence relative to conventional wisdom. Rather than the contract form being the primitive and the behavior the derived consequence, our results suggest the reverse. The differences in contract performance are driven primarily by the sorting of high contributors into non-equal contracts and of low contributors into equal contracts. However, delaying the contracting mitigates these sorting effects, reducing the effort gap between contracts. Taken together, our results suggest that both investors and founders should pay as much (or more) attention to personality type as they do to contract form, but if one is stuck with a given set of personalities delayed contracting (more so than contract form) can improve performance.
Discussant(s)
Florian Ederer
,
Yale University
Florian Englmaier
,
University of Munich
Nico Lacetera
,
University of Toronto
Cédric Gutierrez Moreno
,
Bocconi University
JEL Classifications
  • C9 - Design of Experiments
  • L2 - Firm Objectives, Organization, and Behavior