Social Interactions and Entrepreneurial Activity


  • Previous versions of this paper were circulating under the title “Does Prestige Matter More then Profits?” We are grateful to two anonymous referees, a coeditor, Howard Aldrich, Wendi Carlin, Luigi Guiso, Augustin Landier, Paul Oyer, Mitchell Petersen, Elaina Rose, Patrik Safvenblad, Robert Shiller, and seminar participants at the American Economic Association Meetings, the Conference on Economics and Psychology in Toulouse, the EVI Conference at the Stern School of Business at New York University, the Kellogg Graduate School of Business at Northwestern University, the North American Winter Meetings of the Econometric Society, the CEPR Workshop on “Understanding Productivity Differences” in Alghero, the Institute of International Economic Studies (IIES), the University of Uppsala, the Research Institute on Industrial Economics (IUI), the Stockholm School of Economics, the Center for Economic and Business Research (CEBR), the European Meeting of the Econometric Society in Stockholm, the University College of Dublin, and the ESF Conference on Transition and Development in Stockholm for comments. We are also grateful to Jonas Vlachos for providing some of the municipality data. Any errors and omissions are entirely our own. The authors gratefully acknowledge financial support from the Jan Wallander and Tom Hedelius Foundation (Giannetti and Simonov), the European Commission (grant CIT5-CT-2006-028942), and the Swedish National Science Foundation (Giannetti).


We show that individuals residing in highly entrepreneurial neighborhoods are more likely to become entrepreneurs and invest more into their own businesses, even though their entrepreneurial profits are lower and their alternative job opportunities more attractive. Our results suggest that peer effects create nonpecuniary benefits from entrepreneurial activity and play an important role in the decision to become an entrepreneur. Alternative explanations, such as entry costs, social learning, and informal credit markets, are not supported by the data.