Financing Entrepreneurship and the Old-Boy Network

40 Pages Posted: 4 Feb 2012

See all articles by Eren Inci

Eren Inci

Sabanci University

Simon C. Parker

University of Western Ontario; Durham University - Department of Economics and Finance; IZA Institute of Labor Economics

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Abstract

We study entrepreneurs' start-up financing from banks and local financiers. An informal network, whose membership cannot be observed by outsiders, conveys the good signals it gets about the hidden types of network entrepreneurs to local financiers, which are then reflected in different loan terms. We show that there are winners and losers as a result of the network even among its members. Because all projects have positive net value, it is efficient to finance them even in the absence of a network. Thus, the formation of the network is inefficient as entrepreneurs incur networking costs for purely redistributive gains in the form of better loan terms as network members.

Keywords: entrepreneurship, financiers, networks, start-up financing

JEL Classification: D82, G20, L26

Suggested Citation

Inci, Eren and Parker, Simon C., Financing Entrepreneurship and the Old-Boy Network. IZA Discussion Paper No. 6288. Available at SSRN: https://ssrn.com/abstract=1999316

Eren Inci (Contact Author)

Sabanci University ( email )

Orhanli-Tuzla, 34956 Istanbul
Turkey

HOME PAGE: http://myweb.sabanciuniv.edu/ereninci/

Simon C. Parker

University of Western Ontario ( email )

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London, Ontario N6A 5B8
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Durham University - Department of Economics and Finance ( email )

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United Kingdom
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IZA Institute of Labor Economics

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