AbstractResearch SummaryWhy do individuals become entrepreneurs? Why do some succeed? We propose two theories in which information frictions play a central role in answering these questions. Empirical analysis of longitudinal samples from the United States and the United Kingdom reveals the following patterns: (a) entrepreneurs have higher cognitive ability than employees with comparable education, (b) employees have better education than equally able entrepreneurs, and (c) entrepreneurs' earnings are higher and exhibit greater variance than employees with similar education. These and other empirical tests support our asymmetric information theory of entrepreneurship that when information frictions cause firms to undervalue workers lacking traditional credentials, workers' quest to maximize their private returns drives the most able into successful entrepreneurship.Managerial SummarySteve Jobs, Bill Gates, Mark Zuckerberg, Rachael Ray, and Oprah Winfrey are all entrepreneurs whose educational qualifications belie their extraordinary success. Are they outliers or do their examples reveal a link between education and success in entrepreneurship? We argue that employers assess potential workers based on their educational qualifications, especially early in their careers when there is little direct information on work accomplishments and productivity. This leads those who correctly believe that they are better than their résumés show to become successful entrepreneurs. Evidence from two nationally representative samples of workers (from the United States and the United Kingdom) supports our theory, which applies to equally to the immigrant food vendor lacking a high school diploma as well as the PhD founder of a science‐based startup.

Milton Friedman famously suggested that firms ought not divert profits toward public goods because shareholders can better make these contributions themselves. Despite this, activist shareholders are increasingly successful in persuading firms to be “socially responsible.” We study firm behavior when shareholders care about public goods as well as profits and when managerial contracts reflect these concerns. Under these ideal conditions, managers redirect more profits toward public goods than shareholders would when acting separately—shareholders are poorer but happier. Further, so long as the public good is sufficiently desirable, the manager selects the socially optimal level of output, despite the mismatch between shareholder preferences and those of society at large. This paper was accepted by Joshua Gans, business strategy.

We develop a formal model to understand the selection and influence effects of social proximity (homophily) between business partners. Consistent with the model's predictions, we find that U.S. venture capitalists (VCs) are more likely to select start-ups with coethnic executives for investment, particularly when the probability of the start-up's success appears low. Ethnic proximity between VCs and the start-ups they invest in is positively related to performance, measured by the probability of the companies' successful exit through acquisitions and initial public offerings (IPOs) and net income after IPO. Two-stage regression estimates suggest that these positive performance outcomes are largely due to influence, that is, superior communication and coordination between coethnic VCs and start-up executives after the investment. To the extent that VCs expect to work better with coethnic start-ups, they invest in coethnic ventures that are of lower observable quality than noncoethnic ventures.

AbstractResearch SummaryWhy do individuals become entrepreneurs? Why do some succeed? We propose two theories in which information frictions play a central role in answering these questions. Empirical analysis of longitudinal samples from the United States and the United Kingdom reveals the following patterns: (a) entrepreneurs have higher cognitive ability than employees with comparable education, (b) employees have better education than equally able entrepreneurs, and (c) entrepreneurs' earnings are higher and exhibit greater variance than employees with similar education. These and other empirical tests support our asymmetric information theory of entrepreneurship that when information frictions cause firms to undervalue workers lacking traditional credentials, workers' quest to maximize their private returns drives the most able into successful entrepreneurship.Managerial SummarySteve Jobs, Bill Gates, Mark Zuckerberg, Rachael Ray, and Oprah Winfrey are all entrepreneurs whose educational qualifications belie their extraordinary success. Are they outliers or do their examples reveal a link between education and success in entrepreneurship? We argue that employers assess potential workers based on their educational qualifications, especially early in their careers when there is little direct information on work accomplishments and productivity. This leads those who correctly believe that they are better than their résumés show to become successful entrepreneurs. Evidence from two nationally representative samples of workers (from the United States and the United Kingdom) supports our theory, which applies to equally to the immigrant food vendor lacking a high school diploma as well as the PhD founder of a science‐based startup.

Milton Friedman famously suggested that firms ought not divert profits toward public goods because shareholders can better make these contributions themselves. Despite this, activist shareholders are increasingly successful in persuading firms to be “socially responsible.” We study firm behavior when shareholders care about public goods as well as profits and when managerial contracts reflect these concerns. Under these ideal conditions, managers redirect more profits toward public goods than shareholders would when acting separately—shareholders are poorer but happier. Further, so long as the public good is sufficiently desirable, the manager selects the socially optimal level of output, despite the mismatch between shareholder preferences and those of society at large. This paper was accepted by Joshua Gans, business strategy.

We develop a formal model to understand the selection and influence effects of social proximity (homophily) between business partners. Consistent with the model's predictions, we find that U.S. venture capitalists (VCs) are more likely to select start-ups with coethnic executives for investment, particularly when the probability of the start-up's success appears low. Ethnic proximity between VCs and the start-ups they invest in is positively related to performance, measured by the probability of the companies' successful exit through acquisitions and initial public offerings (IPOs) and net income after IPO. Two-stage regression estimates suggest that these positive performance outcomes are largely due to influence, that is, superior communication and coordination between coethnic VCs and start-up executives after the investment. To the extent that VCs expect to work better with coethnic start-ups, they invest in coethnic ventures that are of lower observable quality than noncoethnic ventures.

Although the Atkinson and Birch (1970) dynamics of action model of behavior is included in many textbooks, the details of the model are left out. To facilitate the teaching of the full theory, the conceptual model is outlined, research findings are reviewed, and a simulation model using STELLA-II is presented. STELLA-II, an icon-based program, provides a visual representation of the model that students can follow, with graphical and tabular output and animation of the rise and fall of parameter values. © 1995 Psychonomic Society, Inc.

Although the Rescorla-Wagner model is widely taught in learning courses, most textbooks present a simplified version that does not contain all of its parameters. On the basis of Rescorla and Wagner 1972) and the Turbo PASCAL program by Lachnit, Schneider, Lipp, and Kimme! (1988), we created a simulation using STELLA-II, an icon-based program by High Performance Systems, Inc. We argue that this simulation facilitates teaching the complete Rescorla-Wagner model. Using trans-switching (Kimmel & Ray, 1978; Lachnit, 1986; Murrin & Kimmel, 1986) as an example, we demonstrate the effectiveness of the STELLA-II version of the Rescorla-Wagner model as a heuristic tool. © 1994 Psychonomic Society, Inc.