Isaac Hacamo and Kristoph Kleiner
Review of Finance, Volume 28, Issue 4, July 2024, Pages 1311–1344, https://doi.org/10.1093/rof/rfae015
A large body of research shows that social interactions impact the decision to start a business. Entrepreneurship is driven by interactions with current and former entrepreneurs in the workplace, at school, and around the neighborhood. But entrepreneurs are also rare: only 1% of the working-age US population runs a company employing five or more workers. Assuming effects depend on close and repeated interactions, the aggregate effects of these social interactions are therefore negligible.
In contrast, individuals with entrepreneurial ambitions—which we label intended entrepreneurs—are far more common than actual entrepreneurs and exhibit greater cross-sectional variation across groups. For instance, while over 70% of US workers would prefer to be self-employed, these estimates are far lower for Northern European countries, such as Denmark (30%) and Norway (27%). If social interactions with, and among, intended entrepreneurs affect the rate of business creation, the aggregate effect of social networks on entrepreneurship might be largely underestimated in existing literature.
To examine whether intended entrepreneurs affect the rate of entrepreneurship among their peers, we analyze the career paths of individuals graduating from a Master of Business Administration (MBA) program. MBA graduates are disproportionately responsible for high-growth entrepreneurship: 22% of VC-backed startups were founded by an MBA graduate and 70% have at least one MBA graduate on their management team. We focus on Indiana University (IU) MBA graduates, ranked as a top ten Entrepreneurship Program according to the 2021 US News and World Report. We estimate two percent of the firms created by IU-MBA graduates are acquired or successfully complete an IPO. In addition, four percent of the firms receive venture capital funding, a rate six times higher than the average new firm in the economy.
To causally identify peer effects, we exploit the fact that every entering IU MBA student is randomly assigned to a cohort and a team in their first year in the program. Students in the same cohort take the core MBA classes together, while students in the same team are assigned to work together on course projects and a large case study at the end of the first semester. Given that students do not choose these groups, some students will be more exposed to a particular set of students for reasons exogenous to their ability, effort, or interests.
We estimate that each additional intended entrepreneur increases the rate of entry into entrepreneurship among cohort members by 0.4 percentage points. Given the rate of firm creation during the three years following MBA graduation (3.4 percentage points), intended entrepreneurs increase entry to entrepreneurship by 12 percent relative to the mean. Similarly, each intended entrepreneur within a team increases the overall rate of entering entrepreneurship by 1.2 percentage points; that is, when interactions are tighter, treatment increases firm creation by roughly 35 percent relative to the mean. Extending the analysis to alternate outcome variables, we estimate that peers increase the likelihood of joining an existing startup by 0.6 percentage points and the likelihood of graduating in entrepreneurship by 2.6 percentage points.