Survival of the Small Firm and the Entrepreneur under Demand and Effciency Uncertainty

The objective of this paper is to o¤er an answer to the question: why do some entrepreneurs wish to own another …rm in the future after having closed an unsuccessful one? We …rst show this question is relevant because making use of a sample of entrepreneurs in the UK who have experienced a business closure, we show that 45% of them have the desire to own another …rm in the future, despite having an unsuccessful experience in small …rm ownership. To tackle our question we develop a model where the pro…ts of the small …rm depend on two …rm-speci…c parameters: the e¢ciency parameter, which represents the skills of the entrepreneur to manage and cope e¢ciently with the everyday tasks of the small …rm, and the demand parameter, which denotes the success of the …rm’s product to attract demand or capture a market niche. It is found that our model answers our initial question by revealing the existence of a mechanism of entrepreneurial self-selection. Under such mechanism, skilful entrepreneurs are the only ones who wish to own another …rm in the future, regardless of the degree of success in their previous venture, whereas unskilful entrepreneurs prefer to go to wage work. We show this mechanism accounts not only for the empirical evidence relevant to our initial question, but also for the rest of cases of entrepreneurs’ attitudes after experiencing a business closure