Financing Entrepreneurship and the Old-Boy Network


  • The authors thank Tom Astebro, Jose Guedes, Peter Thompson, and other participants at the Workshop on Frontiers in Entrepreneurship Research in Lisbon, and Daniel Spulber (the editor), an anonymous associate editor, and two anonymous referees for their helpful comments. Any remaining errors are the responsibility of the authors.


We study entrepreneurs’ start-up financing from banks and local financiers. An informal network, whose membership cannot be observed by outsiders, conveys the good signals it gets about the hidden types of network entrepreneurs to local financiers, which are then reflected in different loan terms. We show that there are winners and losers as a result of the network even among its members. Because all projects have positive net value, it is efficient to finance them even in the absence of a network. Thus, the formation of the network is inefficient as entrepreneurs incur networking costs for purely redistributive gains in the form of better loan terms as network members.