Daniel W. Elfenbein

The Small Firm Effect and the Entrepreneurial Spawning of Scientists and Engineers

Scientists and engineers in small firms are far more likely than their large firm counterparts to enter entrepreneurship. We label this phenomenon the small firm effect and explore its origins. In particular, we identify four classes of explanations for the small firm effect---preference sorting, ability sorting, opportunity cost, and the possibility that workers in small firms develop entrepreneurial human capital---and examine the empirical evidence for each. We find that preference sorting does play a role in generating the small firm effect: small firms attract those with prior preferences for autonomy who are similarly drawn into entrepreneurship. Similarly, ability sorting plays a role: those who ultimately become entrepreneurs may be drawn first to small firms because they offer tighter pay-for-performance links and can subsequently improve their expected earnings by becoming entrepreneurs, or because the skills required for success in small firms are also valuable in entrepreneurship. Evidence suggests that although those with the very least to lose do enter entrepreneurship with greater frequency, opportunity cost has at best a modest role to play in explaining the small firm effect. Finally, we interpret evidence that prior experience in small firms predicts positive performance outcomes in the early stages of entrepreneurship as suggesting that workers in small firms may develop entrepreneurial human capital that makes them better entrepreneurs. This effect may be largest among those of high ability.

Ownership and Control Rights in Internet Portal Alliances, 1995-1999

We examine the structure of more than 100 alliances by Internet portals and other firms between 1995 to 1999 from a contract-theory perspective. Models of incomplete contracts frequently invoke unforeseen contingencies, the cost of writing contracts, and the cost of enforcing contracts in justifying the assumption of incompleteness. The setting in which Internet portals formed alliances was rife with these sorts of transaction costs. We argue that these alliances can be viewed as incomplete contracts and find that the division of ownership and the allocation of control rights are consistent with the incomplete-contracting literature. Copyright 2003 by the RAND Corporation.

What Is a Relationship Worth? Repeated Exchange and the Development and Deployment of Relational Capital

Organization scholars have highlighted the value of relationships in fostering effective exchange, suggesting that repeated exchange creates a relational asset with latent value derived from elevated social connections, norms, and simple expectations of exchange continuity. Yet the empirical evidence supporting such claims remains largely indirect. As a consequence, few studies have been able to directly examine how contextual factors shape the accumulation of this relational asset or define its value in application. We directly measure the value of relationships between suppliers and a large buyer, using the buyer’s choices in Internet-enabled procurement auctions to estimate the degree to which stronger relationship histories with suppliers increase willingness to pay for high-volume commodity-like parts. Our setting also allows us to examine how this willingness to pay for relationships is shaped by the social context in which they develop and by the exchange context in which they are subsequently deployed, while minimizing the confounding influence any private individual interests have on the choice of exchange partners. Our empirical analysis suggests that, even for commodity parts, prior repeated exchange between firms constitutes a valuable relational asset. We also find evidence that suggests that both social mechanisms and incentive considerations underpin the value of relational capital. Further, we find that relational capital exhibits more value when exchange hazards are greater.

Publications, patents, and the market for university inventions

This paper examines factors that influence the likelihood of a university invention being licensed. Inventors’ prior academic output is positively correlated with the likelihood that their new technologies will be licensed, but is uncorrelated with the payments specified by the license contract or the returns of the technology to the university. This suggests that inventors’ academic status attracts the attention of potential licensees, but does not necessarily change their inferences about the quality of technologies for sale. Additionally, patent grants are associated with significant increases in the rate at which technologies are licensed and are most important for inexperienced inventors.

Do Anti-Ticket Scalping Laws Make a Difference Online? Evidence from Internet Sales of Nfl Tickets

This paper investigates the relationship between state level anti-ticket scalping laws and online ticket scalping by examining transactions for National Football League tickets completed on eBay between 2002 and 2005. Despite limited enforcement of regulations in online marketplaces, the evidence suggests that ticket resale regulations do affect the structure of trade online. Stricter regulations were associated with fewer online transactions, a greater frequency of transactions that crossed state borders, as well as higher prices and markups in the secondary market. The evidence suggests that regulations may create significant opportunities for ticket scalpers to capture rents, and these opportunities seemed to be greatest in states that require resellers to be licensed. Over the time period studied, prices and quantities observed in states strictly prohibiting resale above face value became more similar to those observed in unregulated states. These observations are consistent with the idea that market participants updated their beliefs over time about the probability that scalping laws would be enforced online.

Links and Hyperlinks: An Empirical Analysis of Internet Portal Alliances, 1995-1999

This paper examines the structure of over 100 alliances by Internet portals from 1995 to 1999. These alliances were an attractive empirical testing ground because of the large number and heterogeneous nature of the contracts, the high standards for disclosure in the industry, and the careful delineation of ownership, control, exclusivity, and other provisions in the contracts. The division of ownership and allocation of control rights displayed patterns consistent with the predictions in the incomplete contracting literature. Similarly, the exclusivity of the agreements appeared to vary, at least weakly, with the value of the product or service being made available to the portal, consistent with the licensing literature. In other cases, particularly in regard to the differing allocation of ownership and control and the varying completeness of the contracts, the empirical patterns indicated a more complex world than the one that theory led us to anticipate.

Creating and Capturing Value in Repeated Exchange Relationships: Managing a Second Paradox of Embeddedness

Prior empirical studies suggest repeated exchange develops increasing value in buyer-supplier relationships. A first order implication of this finding is that buyers will focus exchange to generate maximum value in relationships. However, buyers are equally concerned with value capture. By distributing rather than focusing exchange, buyers may position themselves to capture more of the value created, leaving buyers potentially conflicted concerning the choice. We label this dynamic the second paradox of embeddedness, distinguishing it from Uzzi’s (1997) paradox driven by technological uncertainty. By examining the procurement activities of a large, diversified manufacturing company, we then test for supplier and buyer behavior consistent with the conditions that enable and behaviors that result from this second paradox.

The Economics of Relational (Social) Capital: Exploring the Value of Exchange Relationships in Industrial Procurement

Organization scholars have highlighted the value of relationships in fostering effective exchange, yet the empirical evidence supporting such claims remains largely indirect. We directly measure the value of ongoing relationships between suppliers and a large buyer, using the buyer’s choices in internet-enabled reverse auctions to estimate the degree to which stronger relationships with suppliers increase its willingness to pay for standardized commodity parts. This setting permits us to focus more sharply on the anticipated benefits generated by pre-existing relationships, while minimizing the confounding influence on partner selection that social attachments associated with these relationships may generate. Our empirical analysis suggests that repeated interaction between firms leads to the formation of relational assets that share a number of properties with physical capital. We thus label these assets “relational capital.” We find evidence that suggests that both social attachments and incentive considerations underpin the value of relational capital. Further, we find that relational capital exhibits more value in some settings than in others and that it exhibits diminishing marginal returns.

Contractual Incompleteness, Contingent Control Rights, and the Design of Internet Portal Alliances

We test theoretical propositions from the literature on information and control in interfirm agreements using a sample of over 100 Internet portal alliance contracts. The literature on information and control in alliances suggests that the use of verifiable performance measures to allocate state-contingent control rights depends (a) on the precision of the information about the realized state and (b) on the level of information asymmetry between the two parties regarding the preferences of each. We test these propositions by looking at how the timing of agreements (a proxy for environmental uncertainty) and exclusivity restrictions (a proxy for incentive conflict) impact the use of a subset of available performance measures. Consistent with a signaling model of the allocation of contingent control rights, we find that contracts involve fewer contingent control rights as industries have matured. Where incentive conflicts are potentially greater, more contingent control rights are used.

Contract Structure and Performance of University-Industry Technology Transfer Agreements

I examine the relationship between the payment structure of contracts and the likelihood of termination using a sample of patented technologies licensed by Harvard University to for-profit enterprises. For early stage technologies such as these, non-contractible effort and investment is typically required from both inventor and licensing firm to bring the technology to market. In this double-sided moral hazard setting, the payment structure stipulated in the contract affects the incentives of firms to invest in and of inventors to provide on-going support for the development of the technology. The analysis shows that for large licensees, the use of (larger) contingent payment terms is associated with lower hazard rates of termination, whereas for small licensees the positive and negative incentives generated by contingent payments cancel each other out. The difference in the impact of incentives between small and large firms is consistent with the literature that suggests that agency problems may be less severe in small firms. An instrumental variables approach is used to account for potentially endogenous relationship between contract structure and performance.