Motivations And Scale

A paper on small businesses.

[W]e show non pecuniary benefits (being one’s own boss, having flexibility of hours, etc.) play a first-order role in the business formation decision. We then discuss how our findings suggest that the importance of entrepreneurial talent, entrepreneurial luck, and financial frictions in explaining the firm size distribution may be overstated.

Here’s the MR link.

Another important quote:

some firms do not grow or innovate simply because they do not want to grow or innovate… those business owners that report starting their business in part for non-pecuniary reasons were much more likely to want to keep their firm size small well into the future.

I recently heard a story about a round of layoffs at a large reinsurance company. It started with an email to 50 or so people (NOT BCC’d!!) who were told to cancel any vacation they had for the next two weeks. Sure enough, two weeks later, as told to me by one of the guys on the list, HR and managers were walking the hallways and slipping into offices to deliver their fatal blow. My storyteller suddenly found himself facing his own angel of death (his boss) but was told his name was a decoy on the list (they couldn’t be that obvious!). He was fine.

Work for yourself, indeed.

Another quote:

Second, some businesses may stay persistently small because they are in industries which have low natural efficient scales. Many small businesses are dentists, plumbers, real estate and insurance agents, small shop keepers, and beauticians. Within these industries, the productivity of the firm is directly linked to the individual’s skill set.

If you’re in a business for which human service is the primary function, there is NO economy of scale. Humans aren’t scalable.

Once upon a time, Investment Banks were such businesses, like doctors and lawyers. They ate or starved on the relationships and execution skill of a few individuals. They found scale when they figured out they could raise capital and trade on their knowledge advantage. The free option (bailout) on their debt for their bondholders turbocharged this model and they became the omnipotent behemoths we know today.