Diversity and Performance in Entrepreneurial Teams

Abstract

We study how diversity affects the performance of entrepreneurial teams. In a business course to build start-ups, we find that homophily among demographic and personal characteristics plays a significant role in team formation. Next, leveraging a cohort of students where team memberships are randomly assigned, we find racial and ethnic diversity significantly degrades performance. Yet, such negative performance effect becomes mitigated when teams are formed voluntarily, suggesting an important role played by selection on unobservables. Our findings are consistent with a model where the costs of cross-racial/ethnic collaboration outweighs the complementarity benefits of demographic diversity. These findings also suggest that policy interventions to improve diversity should consider the process by which teams are formed to avoid compromising on output.

Keywords: Diversity, Gender, Minorities, Entrepreneurship

JEL Classification: L26, D22, M14, M13, J15