Douglas A. Bosse

Trade credit: a real option for bootstrapping small firms

This study uses a real options framework to predict small firm bootstrapping behavior with regard to trade credit discounts. Findings from a sample of 606 small firms suggest their managers place high value on the ability to adjust their decisions over time in response to firm-specific changes in (1) the uncertainty they face; and (2) the irreversibility of their decisions. The insights provided by this study can help scholars and small firm managers better understand how trade discount strategies should be analyzed with respect to other sources of bootstrap and long-term capital.

Stakeholder Relationship Bonds

Scholars and managers continue to seek a better explanation for the behaviours displayed by various stakeholders. An enhanced understanding of the drivers of these behaviours ought to improve an organizations ability to appropriately manage relationships with stakeholders, thereby improving firm performance. This paper provides a detailed look at the concept of a relationship, from the perspective of the stakeholder, by focusing on the perceived psychological bonds that drive a stakeholder to decide whether to continue a relationship with the firm and, if the relationship does continue, how much pro‐relationship behaviour to exert. Our analysis works out how the strength of the perceived psychological bond is measured and establishes the conditions under which bonds will be broken. We also develop conditions that either promote or quash stakeholders’ pro‐relationship behaviour.

Stakeholders, Entrepreneurial Rent and Bounded Self-interest

This paper examines how the change from an assumption of pure self-interest to an assumption of bounded self-interest alters basic propositions regarding the way entrepreneurs select, negotiate with and manage relationships with their initial set of stakeholders. Although a purely economic approach would focus on material cost as the sole consideration when conducting these activities, we argue that nonmaterial factors such as reciprocity and fairness are potent forces during the initial resource acquisition process. We explain that non-material considerations are accounted for in negotiations with stakeholders and positive reciprocity is encouraged through openly sharing information with stakeholders about the value of their contributions to the venture. Furthermore, we expect that entrepreneurs do and should seek stakeholders with expectations about future outcomes that are complementary to their own. This analysis provides a new perspective on the creation of entrepreneurial rent that promises to provide an enhanced understanding of the resource acquisition process as well as guidance to practitioners and researchers. INTRODUCTION Entrepreneurship may be envisioned as a process through which an actor (the entrepreneur) attempts to create rent by attracting and combining resources to satisfy a market need (e.g., Alvarez and Barney, 2007; Schumpeter, 1934; Shane and Venkataraman, 2000). Throughout this process entrepreneurs must engage stakeholders to provide resources – such as prospective partners, employees, customers, suppliers, and financiers – who are often uncertain about the entrepreneur’s probability of success, and give them sufficient motivation to provide their resources to the venture (Freeman, 1984). This can be a challenge because in order to create and appropriate rent the entrepreneur must offer the stakeholders, as a group, less than the value of their combined resources, while at the same time trying to persuade them to engage in the venture (Coff, 2010; Rumelt, 1987). A purely economic perspective to this entrepreneurial problem would suggest that the entrepreneur should seek out those initial stakeholders who are expected to provide their resources at the lowest cost, bargain to extract the lowest cost, and then withhold any information from them that might cause them to want a better deal in the future. The reasoning Stakeholders, Entrepreneurial Rent, and Bounded Self-interest p.3 here is simple to understand if we assume that the entrepreneur is purely self-interested. Based on this assumption, the rational decision is to maximize each transaction without consideration of the interests of the stakeholders. We question whether this assumption provides an appropriate foundation upon which to understand the entrepreneur’s resource acquisition problem and whether it is likely to lead to optimal decisions on the part of the entrepreneur. The efficacy of the pure self-interest assumption will be examined, followed by a discussion of how changing it alters our perspective of the behavior of entrepreneurs as they establish and manage relationships with resource-providing stakeholders. Related to Freeman’s (1999) separation thesis, the logic we build based on the assumption of bounded self interest explicitly recognizes the inseparability of ethical and economic behavior. QUESTIONABLE ASSUMPTION Entrepreneurs require the cooperation of a variety of resource providers in order to create entrepreneurial rent. These resource providers (stakeholders) typically include customers, materials suppliers, financiers, employees, managers, and owners. Explaining the interactions among actors requires an assumption about what drives their behavior. Self-interest is the cardinal human motive that drives behavior in most economics-based theorizing (Miller, 1999; Schwartz, 1986). This way of thinking has a long tradition building at least from Bentham’s (1780) philosophy of utilitarianism. Utilitarianism is based on the principle that humans are motivated exclusively by the pursuit of pleasure and the avoidance of pain. Jevons (1866), one of the co-founders of neoclassical economics, further specified that for economists self-interest refers only to the pursuit of satisfaction arising from the consumption of material goods (commodities). “Economy investigates the relations of ordinary pleasures and pains thus arising, and it has a wide enough field of inquiry. But economy does not treat all human motives. There Stakeholders, Entrepreneurial Rent, and Bounded Self-interest p.4 are motives nearly always present with us, arising from conscience, compassion, or from some moral or religious source, which economy cannot and does not pretend to treat. These will remain to us as outstanding and disturbing forces; they must be treated, if at all, by other appropriate branches of knowledge” (Jevons, 1866: 282). The now-familiar assumption of self-interest is that people attempt to realize the greatest personal pleasure by picking the best combination of commodities they can afford given their income (Varian, 1999). A useful way to examine this phenomenon is in terms of the utility each possible combination might bring to the individual. Each combination of commodities, like a shopping cart, yields a certain number of underlying units of pleasure, which might be called ‘utils’. An actor’s utility function represents the tradeoff calculations he/she makes when evaluating alternative courses of action. A utility function is applied to a set of expected material outcomes that might be consumed given each alternative course of action and a relative preference assigned by the actor to each outcome. The very concept of rent under this assumption, then, refers to the material value of commodities. Although this hedonistic, individualistic assumption about human behavior has helped to explain many features of the collective economic behavior of society, the appropriate focus for explaining how entrepreneurs work with stakeholders to create entrepreneurial rent is on the level of individual actors (Freeman, 1984). Beyond the purely self-interested pursuit of commodities, what motivates the entrepreneur and the prospective stakeholder to engage with each other? Scholars in a range of fields have found that the self-interest assumption is a poor description of human motivation because it abstracts from some of the subtler aspects of humanity and society that affect competitive market behaviors (Jevons, 1866; Keen, 2002). Extensive research in fields such as economics (Fehr and Gächter, 2000), philosophy (Rawls, 1999; Becker, 1986), sociology (Cropanzano and Mitchell, 2005), psychology (Rabin, 1998), Stakeholders, Entrepreneurial Rent, and Bounded Self-interest p.5 and social psychology (Cialdini, 1984) shows humans are only boundedly self-interested. Bounded self-interest means actors’ self-regarding behavior is bounded by the norm of fairness. When they experience something better (worse) than they expected they positively (negatively) reciprocate toward other actors in many competitive market situations (Fehr and Gächter, 2000). That is, economic actors regularly sacrifice self-interest to reinforce behavior they perceive as fair and to punish behavior they perceive as unfair (Thaler, 1991). Self-interest is bounded because while people are motivated by the pursuit of personal pleasure and the avoidance of personal pain, this motivation reaches its boundary when it begins to violate their perceptions of what is fair. Concern for fairness means we are selfand otherregarding, not just self-regarding. Bosse, Phillips and Harrison (2009) provide a review of bounded self-interest that focuses on the work developed by labor economists, behavioral economists, and organizational justice scholars. This work shows employees reciprocate positively to their employers when they perceive that they (and others) have been treated fairly. Positive reciprocity is demonstrated when employees provide more effort or more resources than originally expected. Employees also reciprocate negatively – by decreasing their effort or providing fewer resources than originally expected – when they perceive their employer has treated them (or others) unfairly. The difference between actual effort/resources provided and the expected effort/resources in an exchange can occur because employment contracts are incomplete. Bosse et al. (2009) extend the application of bounded self-interest from the employee-firm context to all stakeholder-firm contexts. The organizational justice literature contributes to the assumption of bounded self-interest by demonstrating that stakeholders’ reciprocal behaviors are likely to be influenced by their perceptions of at least three types of fairness: distributive, procedural, and interactional (e.g., Stakeholders, Entrepreneurial Rent, and Bounded Self-interest p.6 Bosse et al., 2009; Colquitt et al, 2001). In our context, distributive fairness refers to whether a stakeholder believes the distribution of material outcomes to the entrepreneur and the network of stakeholders is justified (Adams, 1965; Nelson, 2001; Rabin, 1993). Procedural fairness refers to whether a stakeholder believes the decision-making process is fair (Lind and Tyler, 1988; Phillips, Freeman and Wicks, 2003). This assessment can include aspects of the decision making process such as the amounts of influence stakeholders have in decision-making and the transparency of the decision criteria. Finally, interactional fairness refers to whether the entrepreneur treats stakeholders with respect and dignity or rudely and dismissively (Cropanzano, Bowen and Gulliland, 2007). Research demonstrates that people collectively consider all three of these types of fairness – and they consider tradeoffs among them – when enforcing the norm of fairness (i.e., Ambrose, Seabright and Schminke, 2002; Blanchflower et al., 1996; Brockner, 2006; Greenberg, 1988, 1993). How does the bou