Working Paper: NBER ID: w31106
Authors: Naomi R. Lamoreaux; Jean-Laurent Rosenthal
Abstract: From Elihu Thomson and Herbert Dow in the late nineteenth century to Steve Jobs a hundred years later, many entrepreneurs have been stymied by their investors. In this paper, we use a simple model to explore how outcomes might have been different if entrepreneurs, instead of the investors, had control of their firms. We also explore the importance of legal rules that enable entrepreneurs to lock in control even when, under one-share-one-vote governance, power would rest with their investors. We find that entrepreneurs take advantage of such rules when the cost of capital is low, as in Britain in the early twentieth century or the US in the early twenty-first century. We also find that firms controlled by entrepreneurs can take on more difficult projects, and thus push the technological frontier out more rapidly, than firms controlled by investors. Such firms are also superior in this way to serial startups.
Keywords: No keywords provided
JEL Codes: G3; K2; N2; N8; O3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Control structure (entrepreneurs vs. investors) (L26) | Types of projects undertaken (O22) |
| Control structure (entrepreneurs vs. investors) (L26) | Innovation outcomes (O36) |
| Low capital costs (G31) | Entrepreneurs retaining control (L26) |
| Entrepreneurs retaining control (L26) | Greater innovation (O35) |
| Low capital costs (G31) | Greater innovation (O35) |
| Historical patterns of control (P26) | Higher rates of innovation (O39) |