Spinoffs of Entrepreneurial Firms: An O-Ring Approach - 10.1628/0932456041960614 - Mohr Siebeck

Oliver Fabel

Spinoffs of Entrepreneurial Firms: An O-Ring Approach

Volume 160 () / Issue 3, pp. 416-438 (23)

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The O-ring theory is used to analyze the emergence of firms organized as partnerships. The owner-managers of such entrepreneurial firms benefit from ability matching within their production teams. However, they must bear the project risk. Risk aversion then induces a second-best solution. Integrated firms managed on behalf of risk-neutral residual claimants face information and/or enforcement problems. Hence, they cannot organize ability-matched teams. There exists an equilibrium such that groups of individuals sharing a superior ability level will found entrepreneurial firms. Low-quality individuals will be employed by managed firms, which hire randomly.

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