An alternative theory of why entrepreneurs do what they do

No lemons here.
No lemons here.
Image: AP Photo/Robert F. Bukaty
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Facebook CEO Mark Zuckerberg has been the talk of Silicon Valley following his public flogging last week by members of Congress. But venture capitalists, those valley denizens who spend their days searching for the next Zuckerberg, have lately been taken with another topic, about what attracts entrepreneurs to entrepreneurism.

The discussion, inspired by a provocative research paper with the very unprovocative title of Asymmetric Information and Entrepreneurship, is far more nuanced than the generally accepted argument that entrepreneurial types simply aren’t interested in “real jobs.” Rather, it suggests that when companies are looking to hire people, a lack of observable signals beyond education credentials and basic work history—the information asymmetry referenced in the title—results in entrepreneurial types feeling “undervalued by the traditional labor market” and ultimately rejecting it.

The research was published nearly a year ago but has recently resurfaced in Twitter threads and blog posts.

The paper’s authors, Deepak Hegde, an associate professor of management and organizations at New York University’s Leonard N. Stern School of Business, and Justin Tumlinson, a senior lecturer at Loughborough University London, found that when “potential employers perceive [an employee’s] productive capacity as lower than he does” it gives the person a reason to start their own venture.

The study draws on two longitudinal data sets spanning close to 20,000 people in the US and in the UK. The UK National Child Development Study (NCDS) follows the lives of every UK resident born during one particular week in 1958 to the present; the National Longitudinal Survey of Youth (NLSY) provides detailed educational records and work histories of US residents surveyed from 1979 until 2010. Amongst Hegde and Tumlinson’s conclusions from the data: “Entrepreneurs have higher ability scores, lower levels of educational attainment, as well as greater and more variable earnings,” which may explain why “several groups with less credible ability signals, such as immigrants, gravitate toward entrepreneurship.”

The most provocative part of the paper has to do with lemons and cherries. It builds upon the paper The Market for Lemons, which was written in 1970 by economist George Akerlof and examines how asymmetric information can degrade the quality of goods and services traded in a market—leaving the so-called lemons behind. In this case, the lemons (i.e. the less talented workers at corporations) get separated from the cherries (i.e. the entrepreneurs who seek “to be a residual claimant on their talents”).

The authors acknowledge that their finding “contrasts with a large literature in social science, which casts entrepreneurs as ‘lemons’—those who either cannot find, cannot hold, or cannot stand real jobs.”

Whether you’re a cherry, a lemon, or the next Zuckerberg, this paper has potential implications for how you might value yourself and your job opportunities in the future, as we rethink standards for educational credentialing, hiring methods, and policies to encourage economic mobility.