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Determinants of entrepreneurial overoptimism at the country level

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Presentation on theme: "Determinants of entrepreneurial overoptimism at the country level"— Presentation transcript:

1 Determinants of entrepreneurial overoptimism at the country level
Jerzy Cieslik – Kozminski University, Warsaw, Poland (KU) Eugene Kaciak – Brock University, Canada & KU André van Stel – Trinity Business School, Trinity College Dublin, Ireland & KU

2 Motivation - Not every entrepreneur contributes equally to macro-economic performance One relatively productive type of entrepreneurs are ambitious entrepreneurs, e.g. in terms of expected job growth (Hermans et al., 2015) At macro level, even failed (ambitious) entrepreneurs may contribute to performance, as they may have challenged other firms to perform better But what if the level of ambitions of entrepreneurs in a country structurally and substantially exceeds realisations? => waste of resources (in case of firm closure) + frustrated entrepreneurs => policy to stimulate ambitious entrepreneurs may be misinformed The current paper documents levels of ‘entrepreneurial overoptimism’ (EO – the difference between ambitions and realisations) at the macro level, using a new direct measure We also explain EO at the country level for 23 EU-countries over

3 Literature Overoptimism versus overconfidence
- overoptimism related to expecting favourable, exogenous outcomes (e.g. the weather) - overconfidence related to assessment of own capabilities to generate favourable outcomes In the case of (ambitious) entrepreneurship, both concepts play a role. We use the term overoptimism in a broader sense, encompassing overconfidence. Micro level effects of entrepreneurial overoptimism - Below-average returns and high probability of failing (-) - Faster decision-making, identifying creative solutions, motivating employees (+) Macro level Excess entry and decreased productivity in industries, high failure rates (bankruptcy costs) (-) Challenging incumbents to perform better, free learning (+) Optimal level of entrepreneurial overoptimism (EO) at macro level? (other paper) - The current paper focuses on determinants of EO

4 Measuring entrepreneurial overoptimism (EO)
Micro level - self-assessment (asking entrepreneurs ex-post if results were in accordance with expectations) - longitudinal measuring (ask about entrepreneurs at time of start-up about expectations and monitor performance over time) Macro level - not much literature on EO at macro level - exception: Koellinger et al. (2007, 2011) => measuring EO indirectly (as a coefficient in a regression model) This paper uses a direct measure of EO. We define EO as the (logarithm of the) ratio of two percentages: - Percentage of TEA with the ambition to employ 5 employees in 5 years’ time (GEM) - Percentage of firms that actually employ 5 employees Assumption: ambition levels and potential for realizing ambitions are (by and large) structural characteristics of a country

5 EO versus new versus old EU-membership (entering EU in 2004 or later)

6 Empirical analysis We use data for 23 EU-countries over the period We document descriptive statistics and present new ‘stylized facts’ regarding the relationship of EO with per capita income and new-EU membership. We run pooled OLS regressions (with standard errors clustered by country) explaining EO from various country level explanations

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8 EO versus economic development (GDP per capita)

9 Regression analysis

10 Conclusions One of the first studies investigating EO at the macro level EO higher in new EU-countries, even after controlling for GDP per capita Various macro-level determinants of EO found, including cultural explanations Policy implication Most EU-countries have higher entrepreneurial ambitions than realisations However, entrepreneurs in the New member states are much more overoptimistic than those in Old member states This need not be problematic in itself as overoptimistic entrepreneurs contribute to the economy as well However, when EO is very high, the negative consequences may dominate => In high-EO countries, stimulating ambitious entrepreneurship may be counterproductive


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