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A Market for Lemons in Serial Entrepreneurship? Exploring Type I and Type II Errors in the Restart Decision

2016

Saras Sarasvathy Kristian Nielsen

Extant literatures on serial and habitual entrepreneurship contain inconclusive findings about the differential impact of learning from success and failure. Yet, there are no published studies combining both the restart decision and restart performance after previous failure or success with a first venture. Using a comprehensive longitudinal dataset of all one-time starts and restarts in Denmark from 1980 to 2007, we discovered the existence of a market for lemons in serial entrepreneurship. First introduced by Akerlof (1970), the market for lemons refers to a market in which low-quality products come to dominate. In serial entrepreneurship, this occurs due to Type II errors in the restart phenomenon. Type I error occurs when a potential entrepreneur endowed with the human and social capital necessary for restart success does not start a second venture. Type II error refers to the opposite and forms the basis for the market for lemons in serial entrepreneurship. Based on our empirical findings, we develop new theory relating these two types of errors to errors in learning attributions resulting in overconfidence bias and thereby impacting performance.

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