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Survival Of The Small Firm And The Entrepreneur Under Demand And Efficiency Uncertainty

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Author Info
Flores-Romero, Manuel G (Department of Economics, University of Warwick,)
Abstract

The objective of this paper is to offer an answer to the question : why do some entrepreneurs wish to own another firm in the future after having closed an unsuccessful one? We first show this question is relevant because making use of a sample of entrepreneurs in the UK who have experienced a business closure, we show that 45% of them have the desire to own another firm in the future, despite having an unsuccessful experience in small firm ownership. To tackle our question we develop a model where the profits of the small firm depend on two firm-specific parameters : the effciency parameter, which represents the skills of the entrepreneur to manage and cope efficiently with the everyday tasks of the small firm, and the demand parameter, which denotes the success of the firm’s product to attract demand or capture a market niche. It is found that our model answers our initial question by revealing the existence of a mechanism of entrepreneurial self-selection. Under such mechanism, skilful entrepreneurs are the only ones who wish to own another firm in the future, regardless of the degree of success in their previous venture, whereas unskilful entrepreneurs prefer to go to wage work. We show this mechanism accounts not only for the empirical evidence relevant to our initial question, but also for the rest of cases of entrepreneurs’ attitudes after experiencing a business closure

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 700.

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Length: 51 pages
Date of creation: 2004
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Handle: RePEc:wrk:warwec:700

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Related research
Keywords: Small Firm ; Entrepreneur ; Survival ; Entrepreneurial Skills;

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Find related papers by JEL classification:
J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

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