31 Jan 2008Working Paper Summaries

Peer Effects and Entrepreneurship

by Ramana Nanda and Jesper B. Sørensen

How do your coworkers affect your decision to become an entrepreneur? The vast majority of entrepreneurs launch their new ventures following a period of employment in established organizations. To date, factors such as the degree of bureaucracy that individuals have experienced have been shown to shape their likelihood to go into business for themselves. But socialization matters, too. Nanda and Sørensen show that the career experiences of coworkers shape both the information and the resources available to prospective entrepreneurs, as well as the value that individuals attach to entrepreneurial activity as a career choice. Key concepts include:

Who your coworkers are, and what they have done in their careers, influence the likelihood that you will become an entrepreneur.
Peers matter in 2 ways: by structuring coworkers' access to information and resources that help identify entrepreneurial opportunities, and by influencing coworkers' perceptions about entrepreneurship as a career choice.
Company policies and practices related to hiring and retention may have indirect consequences for entrepreneurial activity.
These findings have policy implications. For instance, policies that encourage long worker tenures will tend to lower rates of movement between firms, thereby indirectly reducing the supply of prospective entrepreneurs.

Author Abstract

We examine whether the likelihood of entrepreneurial activity depends on the prior career experiences of an individual's co-workers. We argue that peers may increase an individual's likelihood of becoming an entrepreneur through two channels: by increasing the likelihood that an individual will perceive entrepreneurial opportunities, and by increasing his or her willingness to pursue those opportunities. Our analysis uses a unique panel dataset that allows us to track the career histories of individuals across firms. We find that an individual is more likely to become an entrepreneur if his or her co-workers have been entrepreneurs before, or if the co-workers' careers involved frequent movement between firms. Peer influences appear to be substitutes for direct experience: the effects are strongest for those without exposure to entrepreneurship in their family of origin, and for those who have engaged in little inter-firm mobility themselves. These effects are robust to attempts to address concerns about unobserved heterogeneity bias.