Working Paper: NBER ID: w20358
Authors: William R. Kerr; Ramana Nanda; Matthew Rhodes-Kropf
Abstract: Entrepreneurship research is on the rise but many questions about its fundamental nature 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.
Keywords: No keywords provided
JEL Codes: G24; L26; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| costs and constraints on the ability to experiment (D24) | type of organizational form surrounding innovation (O36) |
| costs and constraints on the ability to experiment (D24) | when innovation occurs (O35) |
| experimentation (C90) | entrepreneurial success (L26) |
| decisions made by a few investors (G11) | fate of many entrepreneurial ventures (M13) |
| ability to experiment (C90) | success of entrepreneurial innovations (O35) |
| structural conditions of the entrepreneurial ecosystem (L26) | economic outcomes of innovation (O35) |
| experimental nature of venture capital (G24) | identification and scaling of successful innovations (O35) |