Financing Entrepreneurship and the Old‐Boy Network

27 Pages Posted: 5 Apr 2013

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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Date Written: Summer 2013

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.

Suggested Citation

Inci, Eren and Parker, Simon C., Financing Entrepreneurship and the Old‐Boy Network (Summer 2013). Journal of Economics & Management Strategy, Vol. 22, Issue 2, pp. 232-258, 2013. Available at SSRN: https://ssrn.com/abstract=2245401 or http://dx.doi.org/10.1111/jems.12009

Eren Inci (Contact Author)

Sabanci University ( email )

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Turkey

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

Simon C. Parker

University of Western Ontario ( email )

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Durham University - Department of Economics and Finance ( email )

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IZA Institute of Labor Economics

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