Governance of Collective Entrepreneurship

Entrepreneurs organize into a variety of collective arrangements: partnerships, cooperatives, franchises, joint ventures, and so on. We study the efficiency and viability of these collective organizations. This is done by analyzing communication and the allocation of decision making among members with opportunity costs and knowledgeability differences. Junior members are defined as having a lower value of their outside opportunities than Senior members. Consistent with the previous literature, we find that members' heterogeneity implies costs by making communication coarse and breeding conflict in decision making. However, heterogeneity has also a bright side since heterogeneous partners benefit from learning from each other. We demonstrate that the costs of heterogeneity are allocated by the governance structure, while the benefits of learning are determined by the market. Governance structure and market are, therefore, intertwined. Viable collective entrepreneurship requires that the probability of learning of the non-deciding member is sufficiently low in order to have the benefits of learning outweigh the costs of heterogeneity. One of the implications is that Junior partnerships do not emerge in equilibrium when the probability of learning is lower for Junior than Senior members. More generally, the viability of collective entrepreneurship is problematic in many settings. The identity of the unique, efficient decision maker is characterized by her preferences being congruent with the market and a sufficiently high probability of knowledgeability. Finally, repeated interactions improve viability, which is due to the equilibrium messages being less coarse and the richer strategies in a repeated game