Endogenous formation of entrepreneurial networks

The purpose of this paper is to study the incentives of entrepreneurial actors to collaborate with others in order to achieve superior performance. We consider an environment composed of n entrepeneurial actors who are identical with regard to the type of innovation and their costs for innovative activities. Innovation takes place in a contest where actors invest in knowledge in order to increase their chances of winning. Prior to these investments, actors have the opportunity to collaborate with others and to form an entrepreneurial network. The benefits of such a cooperation arise from the commitment to share knowledge. For a given network structure, we first completely characterize the actors’ investments in knowledge and their resulting payoffs. In particular, we show that bigger entrepeneurial networks are not always more beneficial than smaller ones. Using these results, we then analyze the optimal endogenous formation of entrepeneurial networks in the open and the exclusive membership game. Our results indicate that the size of entrepreneurial networks is rather limited.