A Theory of Entrepreneurship

We propose to study the choice of organizational structure by an entrepreneur who owns control or property rights with respect to some potential innovation. Apart from the option of simply ``selling the idea`` and leaving the exploitation to someone else, this entrepreneur can invite partners into a joint enterprise or hire agents in return for wage payment. In the first case, the resulting partnership implies both shared control rights and shared investment burden for all participants. In the second case, a principal-agent environment is created in which the principal enjoys exclusive control. In both cases, the contract offer is made by the entrepreneur who actively participates in subsequent production. This proposal presents a structured research program that has the potential to delineate which option is best for the entrepreneur under which circumstances. As such, we propose to create an entirely novel theory of entrepreneurship potentially capable of explaining one of the most important choices an entrepreneur faces in both theory and practice. Briefing 1. Proposal Title: A Theory of Entrepreneurship. 2. Proposed Research Problem: What determines an entrepreneurs fundamental choice of organizational structure? 3. Scientific Innovation: The characterization of the determinants of an entrepreneurs optimal choice of organizational structure in relation to the available property and control rights over human, intellectual, or physical capital. 4. Methodology: Game theory; Mechanism design; Contract theory; Economic theory. 5. Involved co-authors (other than the applicant): a. Alex Gershkov: The Hebrew University of Jerusalem; b. Jianpei Li: University of International Business and Economics, Beijing;

Summary for public relations work We study the choice of organizational structure by an entrepreneur who owns control or property rights with respect to some potential innovation. Apart from the option of simply "selling the idea" and leaving the exploitation to someone else, this entrepreneur can invite partners into a joint enterprise or hire agents in return for wage payment. In the first case, the resulting partnership implies both shared control rights and shared investment burden for all participants. In the second case, a principal-agent environment is created in which the principal enjoys exclusive control. In both cases, the contract offer is made by the entrepreneur who actively participates in subsequent production. The environment of analysis involves both moral hazard and (endogenously created) asymmetric information. In this setting, we find that the optimally offered equilibrium contracts, as well as the resulting equilibrium outcomes, differ fundamentally across the studied organizational forms. The main contractual differences are the ability to exit a partnership early, agent limited liability, and long-term vs. spot contracts. We present our results in terms of the project primitives (such as, e.g., success probabilities) and find that the entrepreneur will in general and optimally select different organizational forms for different primitives. As such, we create a novel theory of entrepreneurship capable of explaining one of the most important choices an entrepreneur faces in both theory and practice.