3.1: Problems in Entrepreneurial Teams

Question 1

What are the advantages and disadvantages of entrepreneurial teams? When does it make sense to join one?

Answer 1

1. Advantages: favored by venture capitalists, more skills within the core group
2. Disadvantages: hard to measure individual input which makes distribution of output shares difficult, incentive to shirk given by the second derivative of output based on the inputs
3. Benefit of working together needs to be greater than the costs of organization and monitoring

Question 2

What is a residual claimant monitor?

Answer 2

1. A person who looks over team members, monitors their inputs, and pays appropriate wages - receiving the residual profit
2. Issue that all parties of an entrepreneurial team are residual claimants

Question 3

What are the constraints of a balanced budget in Holmström 1982?

Answer 3

The sum of the individual shares must be equal to the total joint output.

Question 4

How do you reach the Pareto optimal Nash equilibrium a* in Holmström 1982 and what does it imply?

Answer 4

1. You maximize total output minus sum of non-monetary costs of actions.
2. It implies that the marginal output is equal to the marginal non-monetary cost, with consistency coming from the marginal share of an entrepreneur being constant

Question 5

Is there an efficient NE with a differentiable sharing rule in Holmström 1982?

Answer 5

NO!

If the output can be allocated entirely and there exist externalities, no efficient results will be achieved - the free rider is unidentifiable

Question 6

Explain the results of Holmström 1982 with regards to possible share allocations for a Nash EQ.

Answer 6

The solution - with a certain type of sharing rule, a Nash equilibrium can exist, which means that either everybody gets a fair share of output, or nobody gets anything.

Question 7

What are the problems with regards to incentives with the solution in Holmström 1982?

Answer 7

Solution cannot be enforced. Why?

1. Incentive scheme only works if profits are given away
2. Self imposed penalties, and distribution not well defined
3. Incentives enforceable only in the presence of a third party

Question 8

What are the criticisms with regards to the constraints and effort of the model in Holmström 1982? How could they be solved?

Answer 8

1. The constraints are satisfied even if members with low work tolerance receive more money relative to their low effort - as marginal productivity = marginal cost
2. Adverse selection where only bad members are available for a team
3. Private costs thus must be revealed

Question 9

What is the base conclusion of Holmström 1982? Can it be applied in a real world setting?

Answer 9

1. There are problematic aspects to a team production problem
2. The solution of Holmstrom is not easily transferable to an entrepreneurial team because there is no one residual claimant
3. Furthermore, qualitative differences (between team members) make real life application difficult

Question 10

What is the difference between quasi and partnership firms in Becker/Schade (1995) and Fama/Jensen (1983)? What losses are accrued through such agreements?

Answer 10

1. A quasi firm is a bi- or multilateral system of relationships within a business, between entrepreneurs where interactions are sequential transactions
2. Partnership firms have a formal, long-term focus and are cooperations set by a contract
3. Frictional losses are accrued through shirking, negotiation, and allocation of quasi-rents

Question 11

Based on Becker and Schade (1995), how do consultants acquire projects?

Answer 11

1. Own acquisition - phone calls, etc
2. Recommendation by customers
3. Recommendation by others

Question 12

What is the importance of social connections for consulting purposes, and how are the returns of acquisition characterized?

Answer 12

1. Good position within the network is important to acquire consulting projects
2. Creating network though requires effort that’s not available for projects
3. Thus: acquisition success follows the law of diminishing returns

Question 13

What is meant by the specificity and transferability of knowledge, and how is it important for consultants?

Answer 13

Consultants are not needed if all knowledge is unspecific and easily transferred (diffuses easily)

Question 14

How could consulting be improved via specialization?

Answer 14

1. Networking specialist could acquire projects
2. Problem solving specialist could consult
3. Could be realized via a quasi-firm with no long term commitment
4. Could also lead to a partnership firm, which is necessary for high levels of specificity

Question 15

What are some advantages and disadvantages of a partnership firm over a quasi-firm in the case of consultants?

Answer 15

1. Ex-ante fixing of profits
2. Better monitoring
3. Diversification of risk leads to insuring effect
4. But are less flexible
5. And income can be subjected to the losses of a partner

Question 16

What are some characteristics of a hierarchical consultancy?

Answer 16

1. Limited number of possible partners, who need to have specific knowledge
2. Leads to people without prior consulting experience being trained, but the expenses have to be compensated through project gains
3. Transfer of knowledge needs to be done quickly to beat competition
4. Chances and risks posed by former consultants working for customers

Question 17

What are the input factors and costs of entrepreneurial teams co-producing new ventures?

Answer 17

1. Time is the input factor

2. Costs of time are the opportunity costs - how much could be made in traditional work?

Question 18

What is the Vector-Model for the co-production of problem solutions?

Answer 18

1. Work routines of team members are regarded as different linear problem solving technologies - vectors in a space defined by output dimensions
2. Output dimensions are properties required for the success of the new venture
3. Members produce idiosyncratic ratios of the various output dimensions within a certain unit of time based on technology and efficiency

Question 19

What are the components of the Vector-Model for the example of the computer scientist and business student co-production problem, and what is their budget within the model?

Answer 19

1. Ex: computer scientist has a problem solving technology as defined by a vector, business student has another vector for technology
2. Vectors are linked, with the area thus being all problem solutions that can be realized within the given period
3. The budget is represented by the area outside of the production technology vectors

Question 20

What are the results of the Vector-Model for the co-production of problem solutions? What’s the best team?

Answer 20

1. Members of the entrepreneurial team can contribute the wrong property mix, be too slow, and/or be too expensive
2. Person who can do a lot isn’t necessarily good if they’re expensive
3. A mix of cheap and efficient specialists is the best

Question 21

What are the relevant non-deterministic components of new venture success? What is meant by non-deterministic components?

Answer 21

1. Input, transformation process [individual technologies and results from cooperation], output
2. Components are non-deterministic, if one of the features attributed to them is uncertain with respect to its value (…), i.e. several ex-ante unknown realizations of that feature are still possible

Question 22

What is the attribution problem of new co-production ventures, and how could it be solved?

Answer 22

1. The input of each member is unobservable, only output can be measured
2. Every point on the team’s output dimension space can only result from ratios of founder technology inputs - fixed ratio production
3. If the technologies of members are known, then the attribution problem can be solved ex-post
4. Addition of vectors: ti(i1, i2) + tb(b1, b2) = (e1, e2), i.e. the time and technology vector of each member is added to find the observable value of the project, where all variables except ti and tb are known

Question 23

How does the attribution problem of new co-production ventures change with “real” team production?

Answer 23

1. Synergies or frictional losses possible
2. The addition of production vectors is multiplied by a scalar value > 1 for synergies, or between 0 and 1 for frictions
3. The assumption is thus made though that synergies/frictions effect member production proportionately
4. “Real ratio” of inputted time calculable so long as technologies are known
5. Simultaneous synergies and frictions are possible - a factor > 0

Question 24

What are the four categories of environmental risk impact for the attribution problem?

Answer 24

A. Risk influences problem dimensions independently
B. Risk influences team members, maybe due to personal factors, independently and differently.
C. (A+B): Risk influences team members and various problem dimensions independently
D. Influence of risk on project members and problem dimensions is not independent. Instead, parallel influence on problems and team members leads to overall fall in the efficiency of the new venture project.

Question 25

What are the consequences of environmental risk within the attribution problem, and what are some potential solutions to them?

Answer 25

Type A: distortion of initial problem solving technologies occurs. Attribution problem may become unsolvable (unless equation system is over identified).
Type B: real results of inputs can be measured, however, distinction between luck and team members’ inputs impossible. Attribution of contributions can thus be unjust; situation similar to moral hazard problem with a single agent. Solution: repeated cooperation.
Type C: solution more complicated: repeated cooperation required and risk must not influence all problem dimensions independently, otherwise, attribution problem cannot be solved.
Type D: despite risk no real attribution problem exists. Input ratios of team members can be derived in a manner similar to synergies and frictional losses.

Question 26

What are some benefits of long-standing cooperation?

Answer 26

1. Production synergies may increase, or frictions may decrease
2. Mutual understanding of team member production technologies
3. Profit sharing easier with greater knowledge of the attribution problem
4. Just sharing of profits leads to greater efforts